Reprised — Social Security: The Generational Betrayal

Back in 2007 I wrote a series of posts on the future of Social Security on the group Room Eight blog. Later, when writing about generational equity in general, I summarized those posts and provided links back to them. Links to the Room Eight blog, however, no longer work, and the statistics WordPress makes available to me indicate that people are trying to follow those links and getting nowhere. So, while waiting for detailed finance data from the 2012 Census of Governments to be released (and some errors to be corrected), I’ve decided to re-post these essays, adding some additional commentary in italics.

Some broader background. While some public employees, notably those in New York and California, have had their pensions, already the richest, retroactively increased compared with what they were promised when hired, most of those in the generations born after 1957 or so have had defined benefit pensions taken away from them. These were replaced by the falsely named “defined contribution plans,” notably the 401K. They are actually “undefined contribution plans,” and with each recession more and more employers have cut their contributions to zero or close to it. This has been a massive cut in what most people were paid, and workers perhaps should have responded by saving 25 percent or more of their after-tax income for retirement, crushing consumer spending in the economy, to ensure their old age. But instead, induced by advertising, they kept right on spending more than they could afford, and borrowing on top of it. Millions will thus face a vastly diminished life in retirement, with only Social Security to keep them out of extreme poverty. Or perhaps not, because the younger generations made poorer in the private economy by the “one percent” have also been made poorer in the public sector by Generation Greed. The first of the original posts follows after the break.

Nearly 25 years ago those running the federal government made my generation, and those after, a promise: pay a vastly higher payroll tax throughout your lives and accept a later retirement age, and Social Security will be there to keep you out of poverty in your later years. That promise was made by the eight Republicans and seven Democrats, appointed by President Reagan, who made up the 1982 National Commission on Social Security Reform, by the Congress that adopted its recommendations, and by the President who signed them into law in 1983. That Commission, now long forgotten, was headed by Alan Greenspan. The payroll tax increase has been especially burdensome, since this is a tax that hits you harder the less you earn, and the higher rate has coincided with an era in which the distribution of income has become more unequal in any event. Those my age know they will not be allowed to collect Social Security until age 67, rather than age 65. Yet despite all the additional money that has been paid, and the benefit reductions imposed, to “save Social Security,” the truth is that Social Security was not saved. What has happened is a generational betrayal.

The past 25 years should have been the Social Security heyday. Yes people are living longer, but with the entire “Baby Boom” generation at working age, women fully integrated into the labor force, and unemployment down, the ratio of workers with earnings taxable under Social Security to beneficiaries of the program actually rose, with each beneficiary carried by 3.2 workers in 1980 and 3.3 in 2005. With the economy growing faster than Social Security payments, those payments actually fell slightly as a share of GDP, from 4.25% in 1980 to 4.19% in 2005.

Thanks to the 1983 Social Security reform workers and, in particular the self-employed, have had to pay much more into the system in payroll taxes than had been required of previous generations. In 1980, employers and employees each paid 5.08% of wages into Social Security up to the first $25,900 (or $61,383 in 2005 dollars). The self-employed paid 8.1% of their net earnings up to that amount, getting a break. These rates were drastically increased soon after. In 2005, each employer and employee paid 6.2% of wages into Social Security, for the first $90,000 in wages. The self-employed paid 12.4%, covering both the employer and employee shares in full. Medicare payroll taxes have also been increased.

Note that since Social Security taxes stop after a certain wage level, the higher one’s income over that level, the lower the overall payroll tax rate. This has caused the only negative trend for Social Security over the past 25 years. Since the well off are capturing a greater share of work earnings, a greater share of work earnings are over the Social Security maximum, and thus exempt from the payroll tax. Taxable earnings were 88.9% of total earnings in 1980, but only 83.8% of total earnings in 2005, even though the earnings limit for the tax increased more rapidly than inflation.

No matter. For the past 24 years, we have been paying far more in payroll taxes for Social Security than Social Security has been paying out in benefits. In 1980, benefit payments were 106.4% of Social Security taxes, as the trust fund was being drawn down. In 2005, benefits were only 89.9% of Social Security tax revenues, as the trust fund was being built up. In 2005, the Social Security Trust Fund equaled $1.86 trillion dollars, according to the Social Security Administration. And it is that $1.86 trillion dollars, all in Treasury Notes and Bonds, that was supposed to secure the retirement of the Baby Boomers, and those coming afterward, when they got old.

The rest of the federal government, therefore, theoretically owes Social Security $1.86 trillion dollars. Some time between 2012 and 2018 (I’ve heard different estimates), when enough Baby Boomers retire, Social Security will start paying out more than it takes in, even with the higher payroll tax rates, and start drawing down that money. (Note: due to the Great Recession that has already happened, much earlier than predicted.) And now for the two questions that cut through all the bullshit about Social Security.

Where will the rest of the federal government get the $1.86 trillion to pay back Social Security? Well, it will either have to drastically increase taxes, drastically slash other services and benefits, or drastically increase the federal budget deficit – leading to even higher taxes or even greater service and benefit cuts when those higher debts have to be paid. In other words it is those of at the back end of the baby boom, and those younger, will have to sacrifice to pay Social Security back. The federal government has no money of its own. It will have to get it from us.

But wait a minute! If we have already been paying in extra for Social Security in the past, how come we will have to pay for it again in the future? Because the extra money that was collected in the past was spent in the past, and/or substituted for other taxes that were cut in the past. Not only that, but during the past 25 years the federal government borrowed even more money on top of that, and we will have to pay that back too.

The Gross Federal Debt, including what is owed to Social Security, rose from 33.3% of Gross Domestic Product in 1980 to 64.3% of GDP in 2005. The share of this in federal accounts like Social Security rose from 7.2% of GDP in 1980 to 27.0% of GDP in 2005. But even with the rest of the federal government borrowing trillions from Social Security, the federal debt held by the public also rose, from 21.7% of GDP to 31.4% of GDP. It has risen steadily, with the exception of the second half of the Clinton Administration. Therefore, prior generations spent the extra Social Security taxes, and borrowed on top of it. Those extra payroll taxes are gone.

(Note: due to all the money borrowed to offset falling tax revenues during the Great Recession, and prevent it from becoming another Great Depressoin, the federal debt situation is now vastly worse. Moreover, the federal government has taken on enormous contingent liabilities by backing mortgages to keep the price of housing from falling further. The government has acted to force younger generations to pay older generations for housing, and promised to make younger generations pay taxes to pay off debts if the price of housing nonetheless falls.)

Politically, younger generations are being victimized by a double deception. Democrats pretend the Social Security money is actually there, as if we won’t have to pay again to pay it back. But they won’t answer the question of where the rest of the federal government will get the money to pay Social Security back. All objective analysts know the money isn’t really there.

Beginning in 2005, when President Bush said “we have a problem,” some Republicans have been willing to admit the money isn’t there. That’s what they are saying by asserting the federal government will have a problem with Social Security when it has to start paying back the trust fund, not when the trust fund is used up. But Republicans do not admit that less well off Americans have already paid for Social Security in higher payroll taxes in the past, which hit them harder.   You don’t see President Bush, or any Republican, talking about where all those extra payroll taxes have gone. They pretend they didn’t exist.

The current situation is that Democrats are lying about the future, while Republicans are lying about (or at least ignoring) the past. Or, to look at it another way, their g-g-generation of leadership is collectively lying about both the past and the future.

What about the National Commission on Social Security Reform, which created the trust fund and decided that it should consist of Treasury Bonds? What were they thinking? They haven’t said. They were probably thinking that with the federal government borrowing all that money from Social Security, the rest of the federal debt would be paid off, and then some. Later, when the Baby Boomers retired, the debt could just be shifted back from Social Security to the public, leaving the total federal debt no greater than it was to start with. That, however, is not what happened.

When the Social Security money was being blown, why didn’t anyone warn us? Actually someone did: Senator Daniel Patrick Moynihan, Democrat of New York, a member of the National Commission on Social Security Reform. In 1989, just six years after the new rules were adopted, Moynihan realized that higher regressive payroll taxes had merely allowed higher spending and/or substituted for more progressive income taxes. To stop this, he demanded that the false trust fund be ended, and that the payroll tax be cut back to just what was required to pay benefits at the time. The turnabout was considered a shock.

But like your author, Moynihan was either too much of an open-minded truth teller, or too much of an ineffectual freelancing gadfly, to change things. Neither Republicans nor Democrats were willing to give up that extra payroll tax money at a time when budget deficits were soaring. And the public really believed what it was told – that paying in extra meant the money would be saved and their Social Security benefits would be preserved. One member of the public said the following in a submission to the New York Times: “I thought I understood what Senator Moynihan had in mind with his proposal to cut the Social Security payroll tax. He wants to stop using a tax that bears hardest on the poor to reduce the Federal deficit. That sure sounds nice. But if we reduce the payroll tax, won’t benefits be threatened for people who retire in the future?”

Well the future is about to arrive, more payroll taxes have been paid, and the money is gone. The President has admitted our benefits will be cut, but only if we were not “at or over 55” in 2005 when he spoke those words. He’s looking for a deal with his fellow “at or over 55” Republicans and Democrats in Congress to do just that, and perhaps to raise payroll taxes (again!) to pay (again!) for benefits already promised to those at or over 55, to be paid by those younger.

In effect, our elders took our money and handed us an IOU, giving us their blessing to either slash our children’s public services and benefits or tax them into poverty to get the money back. Unlike our elders, the rest of us have to be adults and be honest about our situation.   We must confront three questions, the subject of my next three essays. Where did the money go for the past 24 years? What is the federal government likely to do to us now? And, if it wanted to be fair-minded on a going forward basis, what should it do? One promise — despite the generational betrayal, I will in the end argue that with some responsible changes things need not be so terrible after all, because most of the unfairness has already occurred. We just can’t afford to keep adding to it.

(Forget that promise. The longer the lying goes on, the more the taking goes on, the worse it will be. The so-called solutions will have to be that much worse, the suffering that much greater. And with those who control our institutions seeking to make it to the grave before the sacrifices begin, there are no solutions in sight. Just denial and deceit and, among the future victims, ignorance and apathy. The subsequent essays follow.)