Is the Social Security Trust Fund a Liberal Own-Goal?
The Social Security trust fund is one key rhetorical crux of our budget debates. (I’m punting on Medicare here for the moment; it’s obviously the elephant in the room.)
Liberals think of the trust fund as a big national savings account. They point to the trust fund’s promises to future retirees, their multi-decade contributions to the trust fund, its solvency (it’s been banking >$150 billion in surplus revenues every year [except — for obvious reasons — 2009]), and its projected longevity, to assert that Social Security is in great shape. Just some slight tweaks needed.
Conservatives say the trust fund is a sham, because it contains nothing but promises from the government. Social Security is just a(n unaffordable) transfer program — from younger working people to retirees, the disabled, and widow(er)s and orphans.
Who’s right?
Liberals are totally correct that minor tweaks in revenues and/or spending are all that’s needed. (75-year projected deficits are about 2% of future payrolls, .6% of GDP. Since our country currently taxes about 30% less than most other prosperous countries — 28% of GDP compared to 40% — filling that .6% gap would not be onerous.)
Conservatives are right that the trust fund is basically a chimera. Social Security is for all purposes (you can argue intents amongst yourselves) a pay-as-you-go transfer program.
If we eradicated the trust fund today (along with the debts that government owes to that trust fund), arithmetically it would change exactly nothing. We’d still have revenues and outlays for Social Security. Subtract outlays from revenues, and you’ve got the SS surplus or deficit. It just doesn’t matter whether those revenues and outlays pass through the trust fund, shifting its balances up and down. It’s the same thing as shifting overall government debt up or down.
All of a sudden you’d see $1xx billion dollars a year in additional government revenue (the current annual Social Security surplus). But the government would spend all that instantly, right? We’d owe it to future generations, because we have promised it to them. But that’s exactly what’s happening today. The government is spending those revenues and issuing bonds a.k.a. promises to the trust fund. That’s already a fact, as embodied in the unified budget (combining “on-budget” revenues and spending with the trust funds for Social Security, Medicare, etc.)
But here’s what really bothers me: by insisting on the reality of the trust fund, liberals are putting themselves in a rhetorical trap.
Want to make the Social Security trust fund sustainable long-term without cutting benefits? The obvious solution is to increase its funding source: payroll taxes. The only alternative is for general government to pay for future shortfalls, which would mean admitting that … it’s a transfer program.
But this is an illiberal proposal because payroll taxes are horribly regressive. 1) They only tax earned income — which people presumably actually worked to acquire, and 2) You don’t pay payroll taxes on earned income above $106,800/year (much less on income from your virtuous, meritorious ownership of things).
There is one progressive solution even within this rhetorical box: Remove the $106,800 cap. But once again the liberal rhetorical position precludes it: that cap is only justifiable if you buy into the trust-fund/savings account concept. “People shouldn’t have to put in more than they take out.” If you acknowledge that Social Security’s a transfer program — and that people’s inputs don’t necessarily match their eventual receipts (they don’t, even now, especially if you compare generations), there’s no a priori reason to retain the cap.
Simply removing the earnings cap on payroll taxes would fill the .6% Social Security gap beyond the predictable future. To 2083, to be (falsely) precise. See the CBO’s July 2010 Social Security Policy Options (PDF), pages xi and 18. (Thanks, Bruce.)
It sounds reasonable given that our tax system (state, local, federal combined) is currently not progressive at all above about $60,000 a year in income.
But still: you’re only taxing earned income. And — conservatives will be happy to point this out, correctly — taxing earned income discourages people from working and building overall prosperity. Acknowledging that Social Security is a transfer program lets us fund it with more economically efficient and more equitable taxes like carbon taxes or even — gasp — increased taxes on unearned investment income, or wealth.