Is the Social Security Trust Fund a Liberal Own-Goal?

November 12th, 2010

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 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 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 investment income.

  1. Chris T
    November 12th, 2010 at 10:28 | #1

    SS is one of those topics that causes liberals to utterly lose their heads. The trust fund is made up of government securities which can be redeemed at the expense of the general fund. If the general fund was not running a deficit, this wouldn’t be a problem. It is, and SS would therefore only be adding to the deficit.

    Pretending as though there are current real assets backing the program is silly.

  2. November 12th, 2010 at 10:33 | #2

    @Chris T

    Chris, just one correction:

    “SS would therefore only be adding to the deficit.”

    It’s currently running massive surpluses. Over 75 years with no changes, it will be in (slight) deficit.

  3. Chris T
    November 12th, 2010 at 12:09 | #3

    @Asymptosis
    I meant when it starts drawing from the trust ‘fund’.

  4. Luke
    November 12th, 2010 at 12:15 | #4

    The reason liberals are reluctant to acknowledge that Social Security is a transfer program is that once the public understands this, support for transferring money to wealthier retirees will drop. The argument has always been that Social Security should be a universal scheme and not particularly focused on the poor.

    Personally I feel that a debate over who should be receiving SS benefits would be healthy. Social Security spends huge amounts of money on the wealthiest demographic, and yet still leaves 13% of the elderly living in poverty.

  5. November 12th, 2010 at 12:38 | #5

    Luke :
    “support for transferring money to wealthier retirees will drop.”

    I think you’re absolutely right, Luke, but I’d add that there’s a major demagogueographic that primarily objects to transfers to the poor. This due to hundreds of billions of dollars in propaganda over forty years devoted to convincing them that the big sucking sound they hear is money being funneled to shiftless poh folk and furriners.

    (Yes, prosperity is increasing for median folks in developing countries while declining or staying stagnant here, which gives the impression that they’re taking our prosperity. But the increasing prosperity elsewhere would be a win-win if the win for our side wasn’t being hoovered up by a tiny cohort of our fellow citizens.)

  6. November 12th, 2010 at 15:11 | #6

    Excellent post, except for the last paragraph.

    And — conservatives will be happy to point this out, correctly — taxing earned income discourages people from working and building overall prosperity.

    Everything I’ve read from people I trust says the opposite – taxation either has no effect on willingness to work, or actually encourages more work among those who are greedy and/or ambitious enough to go get it.

    Seriously – isn’t that line just right wing bull-shit, a la the recent Mankiw editorial that got so thoroughly and deservedly pilloried all over the place?

    Cheers!
    JzB

  7. November 12th, 2010 at 16:16 | #7

    jazzbumpa : taxation either has no effect on willingness to work, or actually encourages more work among those who are greedy and/or ambitious enough to go get it.

    I think it’s just as silly to deny the substitution effect (tax means less money so people choose leisure instead of work) as it is to deny the income effect (tax means less money so people work harder to make more). And the right-wingers love to deny the income effect. I had an email conversation with a Cato “scholar” once and couldn’t even get him to admit it exists. He just dodged, weaved, and evaded until I gave up. I give a very clear explanation of how that effect plays out (via spreadsheet) for business owners here:

    http://www.asymptosis.com/you-deserve-it.html

    We have the disadvantage of fighting this fight with one hand behind our backs: we’re not willing to mispresent reality, ignore inconvenient facts, etc., the way they are.

    That said, I don’t know if anybody knows which predominates — income effect or substitution effect — much less understands in any useful way how they play at different income levels, or interact with each other and with other effects.

    But that said, I think people do avoid work some because of marginal tax rates. (Married moms thinking of entering the work force are a prime example.) And I find myself pretty convinced by Lane Kenworthy’s stuff — notably in Egalitarian Capitalism — showing that lots of people working (not necessarily full time) makes for a more prosperous and more equitable society.

    So I’d like to see our tax mix move away from taxing earned income to taxing other things, especially those with negative externalities like carbon and an excessively large financial system. That wold also increase progressivity without the deadweight loss that high marginal income rates can engender, making the whole shift a win-win-win.

  8. November 12th, 2010 at 19:13 | #8

    What percentage of the population realistically has the opportunity to substitute between work and leisure? When I was working, I was pretty much expected to at least show up.

    People take their vacations, sure because they are allowed to as part of their work agreements.

    Others are forced into involuntary overtime.

    Seriously, you believe that increasing a marginal rate from 36 to 39%, or eliminating the cap on FICA is going to make people say, “Screw it. working just just it make it worth while to get out of bed!”

    Maybe at a marginal rate of 70%, or so, I’d agree. Maybe for somebody making over a million, the marginal utility of the next dollar is MEH! anyway. For the vast majority of real people in the real world, the ability to substitute leisure for work is either not available or not affordable.

    And if Mankiw stops writing, we’re all that much better off, anyway.

    Cheers!
    JzB

  9. November 12th, 2010 at 19:15 | #9

    That should be:

    Working (at the higher tax rate) just doesn’t make it worth while to get out of bed.

    Sorry bout that.
    JzB

  10. November 12th, 2010 at 20:02 | #10

    Of course, if taxation lowers the incentive to work, so does a too-low wage structure. Less is less, either way — right?

    This, of course, gives us the GREAT VACATION theory of unemployment, so common back in the 30’s, and still, as recently as yesterday, being promoted by the laughable Art Laffer.

    Employment is low because the incentives for workers to work are too small, and the incentives not to work too high.

    http://online.wsj.com/article/SB10001424052748703514904575602912888140050.html?mod=googlenews_wsj

    Now I understand why U6 is 17%.

    JzB

  11. Zara
    November 13th, 2010 at 01:04 | #11

    “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.”

    I don’t think we live in a time or place in which that “sounds reasonable” at all. Given the state of your “demogogueographic,” acknowledging that SS is a transfer program would yield what? A lift on the cap? Stop, you’re tickling me.

  12. November 13th, 2010 at 06:32 | #12

    jazzbumpa :

    Of course, if taxation lowers the incentive to work, so does a too-low wage structure. Less is less, either way — right?

    Yeah, his/their rhetoric is twisted and largely specious. I’ll cut to the chase and say that my proposed solution is a major increase in the Earned Income Tax Credit, funded by… As I start to explain, I realize that I need to do a full post on that. Anon.

  13. November 13th, 2010 at 06:42 | #13

    Zara:

    I don’t think we live in a time or place in which that “sounds reasonable” at all. Given the state of your “demogogueographic,” acknowledging that SS is a transfer program would yield what? A lift on the cap? Stop, you’re tickling me.

    Ah, Zara, you do speak truth. But here’s where I’m coming from on this:

    I heard a guy on the radio the other day talking about America fighting (and winning) wars with one hand tied behind our backs: we won’t do what they do, and we’re still gonna win. Nazi Germany. Not as much, but still to a major extent: Islamic fundamentalist terrorists.

    Repeating from above: same thing in our battle for soul of America. We are supposed to be the reality-based community. Denying the reality of the (arithmetically meaningless) SS trust fund is really … denying reality. That’s what they do.

    I have to believe, hope, that in the long game (which I devoutly, fervently hope is what Obama’s actually trying to play), fighting that way will win a lasting victory. (This does not preclude fiery rhetoric, which I would like to hear a lot more of from Obama. Quoting both Roosevelts, for instance, on concentrated money interests.)

    But it’s quite possible I’m just sitting here starry-eyed, with my finger twirling in my cheek…

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