(For previous posts in this series, see here.)
We currently see this curious double-talk taking place about the US bonds that form the assets of the Social Security trust fund. When trying to scare people about Social Security, people in this administration talk about the bonds in the trust fund being ‘worthless’ pieces of paper. But when trying to actually sell the bonds in international markets to finance its deficits, the government talks about how robust the US economy is. Like all double-talking politicians, the two different faces are presented to two different audiences, with the hope that the audiences will not overlap.
The scaremongering is aimed directly at the domestic audience because they are the ones who need to be frightened into allowing Social Security funds be released into the hands of private investors, thus enormously enriching Wall Street. The reassuring language about the strength of the US economy and its undoubted ability to honor its debts is addressed to the foreign entities that buy US treasury bonds to finance the deficits.
In April 2005, just after the 2004 presidential election and when he had high hopes of persuading people to privatize Social Security in his second term, George W. Bush made an extraordinary speech in which he sneered that the trust fund only contained IOUs.
I have just come from the Bureau of Public Debt. . . . I went there because I’m trying to make a point about the Social Security trust. You see, a lot of people in America think there’s a trust, in this sense — that we take your money through payroll taxes and then we hold it for you, and then when you retire, we give it back to you. But that’s not the way it works.
There is no “trust fund,” just IOUs that I saw firsthand.
. . .
The office here in Parkersburg stores those IOUs. They’re stacked in a filing cabinet. Imagine — the retirement security for future generations is sitting in a filing cabinet.
Yes, imagine that! He saw the IOUs first hand, otherwise he would never have believed that this was happening! Who knows, someday it might get even worse and be just an entry in a computer spreadsheet, so we wouldn’t even have the sheets of paper to fall back on!
Former New York Times business reporter David Cay Johnson in his book Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003) describes an even earlier effort to denigrate the Social Security trust fund.
[On June 19, 2001] Just 12 days after Bush signed his tax cut bill, Treasury Secretary Paul H. O’Neill gave a speech at the top of the World Trade Center. He spoke to the Coalition for American Financial Security, an organization of investment managers who want to replace part of Social Security with private investment accounts, from which they would collect fees costing many times the current costs of administering Social Security.
“I come to you as managing trustee of Social Security,” O’Neill said. “Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow.”
All Americans had, he said again and again, was “someone else’s promise” that the pieces of paper held by the Social Security Administration would be paid off with hard dollars by the United States government. And the implication was that the unsecured debt might not be paid. (p. 127)
This is quite an amazing thing: The highest officials in the US government saying that others should not depend on the government to honor its financial obligations. It is the equivalent of saying that the IRS may in the future no longer accept US currency as payment for taxes owed but would demand euros instead. Of course, only rubes like us were supposed to believe that message. If the international financial markets truly believed it might happen, they would immediately sell all their US bond holdings, the US could not longer finance its deficits by selling those very same bonds in the global markets, and the US would be facing a complete economic disaster.
So when talking to other governments and the financial markets, the government makes a complete about-face and talks about how strong the US economy is and how the ‘full faith and credit of the US government’ has never been more solid.
David Cay Johnson shows that manufacturing a Social Security scare to enrich already wealthy people is not a new phenomenon. The first version of Social Security was created in 1935 but it has been tinkered with ever since. In 1972, Congress passed legislation creating the Supplementary Security Income (SSI) program and significantly increasing Social Security benefits, such as introducing automatic Cost-of-Living-Adjustments (COLAs). In addition:
The bill creating the SSI program also contained important provisions for increasing Social Security benefits for certain categories of beneficiaries (primarily aged widows and widowers). It also provided: a minimum retirement benefit; [and] an adjustment to the benefit formula governing early retirement at age 62 for men, in order to make it consistent with that for women[.]
. . .
The separate bill creating automatic COLAs also provided for automatic increases in the earnings subject to Social Security taxes and an automatic adjustment in the wage-base used in calculating benefits.
Of course, the increase in benefits meant increased costs and created long term solvency problems. So new legislation was passed in 1977 that reduced benefits and raised the payroll tax to its current value. As a result of the formula that was used, this initially increased revenues by small amounts but eventually the surpluses became large enough that between 1983 and 2003, while the sum of the government deficits for those twenty years (i.e., the excess of expenditure over revenues for those years alone) was $5.4 trillion, the addition to the national debt (i.e., the total accumulated amount of all deficits over all time) was ‘only’ $3.6 trillion. The $1.8 trillion difference was due to the fact that the Social Security account was running up huge annual surpluses. (Johnson, p. 123)
This Social Security surplus was used to create a false sense of the country being flush with money and this enabled Ronald Reagan in 1981 to push through his tax cuts for the rich. The Social Security surplus was used to hide the true costs of the massive tax giveaway to wealthy people.
In 1983 there was glitch in that Social Security ran a small deficit due to the fact that 10 million people were then out of work and thus payroll tax revenues were down. While most people felt that this was a short-term problem that would go away when the economy revived, others like Wall Street favorite Alan Greenspan (then chairman of the Federal Reserve Board) tried to panic people into thinking that Social Security was in crisis and Congress again passed new rules reducing benefits again and raising the retirement age in the future. This resulted in Social Security starting to run up surpluses again.
The siphoning away of the Social Security surplus to benefit the rich was repeated during the George W. Bush administration. The federal government was running a total budget surplus at the time that he came into office in 2000, and again this was largely due to the Social Security surplus. In fact, between 1999 and 2002, Social Security revenues exceeded expenditures by $640 billion. Bush used this surplus to to hide the true cost of the huge ‘temporary’ tax cuts for the rich pushed through by him in 2001. More than half of the $1.3 trillion that those tax cuts cost the government went to the richest 1% of the population. (Johnson, p. 127)
Bush is now making a last ditch effort to make those tax cuts permanent as his parting gift to his wealthy base, before he ignominiously leaves office with the title of Worst President Ever. (That serial panderer John McCain supports this policy of making the tax cuts permanent although he originally opposed the tax cuts.) So again what we have is that they are taking advantage of the revenue surpluses produced by the Social Security payroll tax (which is mostly paid by poor and middle class people) to fund huge tax giveaways for the very wealthy. It is Robin Hood in reverse, a welfare state for the rich.
Next: More realistic views of Social Security’s future.
POST SCRIPT: My radio interview