When pols in Washington lie, it’s business as usual. When they actually seem to believe the nonsense they’re spouting, however, it gets scary. President Obama’s recent comments about Social Security suggest that with respect to this issue, the man is so deeply immersed in kinky Beltway thinking he’s lost touch with reality.
The president has been criticized for not taking on the entitlement overhangs in his new budget proposals — entitlement programs that along with the military make up the bulk of federal spending. He ducked on Medicare and Medicaid entitlement spending, saying they were issues that would be addressed at a later date. Fine. But when it came to Social Security, he noted there’s no immediate worries about meeting this program’s benefit obligations.
His reasoning? Although last year the Payroll Tax brought in less than it paid out in benefits, and this deficit will grow dramatically as baby boomers queue up at the Social Security window, interest generated by the Social Security Trust will make up this deficit a least until 2039, and perhaps even longer because the interest that flows into this trust from its bond holdings will also grow in coming years.
Duh.
A Social Security 101 reality check shows just how wacky is this interpretation. Some 30 years back that titan of economic brilliance and Ayn Rand devotee Alan Greenspan engineered a so-called reform of Social Security financing. Instead of doing what most other developed countries do to meet financial challenges in this realm — have a pay-as-you-go system (usually part of general revenues) that each year collects the taxes it needs to meet its benefits obligations — Greenspan concocted the fiscal monstrosity we have today.
This involved a Payroll Tax that for 30-odd years collected more each year from poor and middle income earners than it paid out in benefits, with this tax capped to exclude earnings from the well-to-do (this cap today is about $106,000). All the excess Payroll Tax collections for three decades went toward the purchase of Treasury bonds that have accumulated in what is laughingly termed a “trust” — the Social Security Trust.
The rich loved this approach because the country’s largest entitlement program is funded by one of the most regressive taxes on the planet. The Beltway crowd loved this system as well because the excess Payroll Tax collections for 30 years that purchased only government bonds was not counted as part of yearly deficits so the actual size of government overspending could be disguised in this period. As for most people in the general public, well, they just paid in and looked forward to the day they could take out, without worrying too much about the details.
Now, alas, this country’s longest running and largest ever Ponzi scheme is hitting the wall. Hitting it today, not 27 years down the road as Beltway head-in-the-sanders pretend.
The reason is that the interest on the government bonds held in the Social Security “Trust,” the interest that is supposed to make up for Payroll Tax collection shortfalls, is interest that will have to be generated with either new taxes, or more likely, with more government borrowing.
What’s happening here in other words, is this: The government is borrowing with one hand to give to the other hand which in turn hands it out to people who will be responsible for servicing the costs of this borrowing down the road.
This is why Social Security is a fiscal time bomb today. Today! Not decades from now.
This bomb can be defused, of course. The very best way would be this: Since this “trust” is a flagrant shell game, just abolish it and pay any deficit in benefits directly from borrowing — which, in fact, is what is happening anyway. Abolition of this “trust” would have the added benefit of making our nation’s overall debt situation look a lot better immediately.
But forget that solution. This is America 2011.
The progressive way to defuse this creeping horror is to subject all earned income to the Payroll tax while capping benefit pay-outs to present inflation-adjusted levels. Or if this sounds too progressive (it’s socialism, mama, grab the M-16s and head for the shelter!) simply raise the income level subject to the tax annually and gradually — just enough to meet pay-out obligations.
Or we could just keep fudging and lying to each other about the true nature of the Social Security “Trust” in hopes it will somehow resolve itself with no added pain to anyone.
Yeah. Right.
My all-time favorite cartoonist was Rube Goldberg and his wacky contraptions. Little did I suspect in the years when his stuff was appearing in the funny papers that these cartoons were serving as inspirations for future government policy makers. Silly, silly me…
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