Saturday, December 18, 2004

Social Security and the Crisis in American Life

More than ten years ago, in 1993, Bill Strauss and Neil Howe published Generations, arguing that American life is periodically shaped in great crises that redefine the role of the government. Finding that these occurred every eighty years or so, they predicted another one beginning in about 2010--a timetable which now seems somewhat conservative. When I reviewed their next book, The Fourth Turning, in 1996, I tried to insert a caveat--that American life might have become so divorced from actual facts that we might no longer be able to cope with a crisis. The current controversy over the future of the Social Security system illustrates what I meant, and, I am sorry to say, suggests that I might have been right.
For the last 70 years--since the onset of the New Deal--the Federal Government has gotten bigger and more complex--and for the last 40 years, media coverage has gotten shorter and less sophisticated. As a result, even the relatively well-educated citizen no longer knows or understands the basic data regarding our government's economic role or the decisions it makes. How many of us can give a good rough figure for the size of our GNP (about $11 trillion), or the Federal budget ($2.16 trillion), or the Federal deficit (about $380 billion)? How many people understand how rapidly federal revenues have been declining under the Bush Administration, which has apparently drastically underrepresented the impact of its own tax cuts? And how many have understood the scandal that has surrounded the Social Security system for the last two decades, which will come home to roost some time in the 2010s?
The story dates from the early 1980s, when the Reagan Administration determined that the current benefit package was not sustainable and tried, in theory, to do something about it. Reagan began by announcing a sweeping set of benefit cuts, but a political firestorm forced him to abandon that tack. Instead, the Congress eventually passed a large increase in payroll taxes--one that would for about 35 years bring in considerably more revenues that benefits would demand. Coupled with Reagan's cuts in the top tax brackets, this made the tax system far more regressive, but astonishingly, no one seemed to care very much. (Because of the payroll tax hike and other "revenue enhancements," Reagan didn't actually cut taxes overall at all--he simply redistributed them from richer Americans to the middle class.) The extra revenue has theoretically gone to a trust fund, a huge nest egg that was supposed to make up for the Social Security deficit that was predicted to emerge sometime in the 21st century.
Within a couple of years, those few who noticed--led by Senator Pat Moynihan, who had helped broker the deal--realized that that was not what was happening at all. Instead, faced with huge deficits, the Reagan Administration was simply amalgamating the Social Security surplus with general revenues and spending it. The critical mistake in the legislation--and because historians no longer study legislation, we stil have no idea, and may never know, how this happened--was the failure to earmark the surplus in Social Security to purchase actual negotiable, interest bearing government securities. Instead, the Social Security Administration has received non-negotiable government bonds which represent unfunded future claims on the US Treasury.
When Al Gore talked in 2000 about a "lock box" for the $200 billion annual surplus that the government was running, he was actually trying to address this future problem, by finding a way to earmark the surplus to meet the future claims on social security. He had not, apparently, worked out a detailed plan for doing this--and even if he had, the media would never have reported it, preferring instead to laugh at his image as a hopeless policy wonk fond of exaggeration--but his basic principle was sound. The surplus, of course, did not survive two years of the Bush Administration, to whom it was an ideological affront and a threat to long-term plans to slash the role of the federal government in American life. This year's deficit will probably reach $400 billion after new appropriations for Iraq, and no improvement in our fiscal health is in sight.
Meanwhile, the President, who now wants to borrow several trillion dollars as part of a scheme to reduce future Social Security benefits and create private accounts, is leading a propaganda campaign based on the idea that a social security crisis is imminent. Two dates for the "insolvency" of Social Security are being bandied about--2018 (the favorite of the Administration) and 2052 (the figure cited by non-partisan entities like the Congressional budget office.) Both, alas, are ways of denying the terrible, unforgiveable fraud that the government has perpetrated on the American people for the last twenty years.
The 2018 date represents the year in which, at current rates, Social Security taxes will no longer cover projected benefits--and the Trust Fund that will have been theoretically accumulating for 35 years is supposed to kick in. That can only happen, however, if the government raises taxes or borrows more money to meet those obligations, since the trust fund is not composed of real negotiable assets. The 2052 date is the year in which the trust fund (which actually has no real assets even now) will be exhausted. The Bush Administration and its media acolytes (like Tucker Carlson) are simply adopting 2018 as the crisis year. This amounts to admitting that the Reagan Administration and every subsequent Administration (except the Clinton one, which brought the budget into balance) has been lying to the American people all along about where their payroll taxes have been going--but no one knows enough about that issue even to raise it.
What should be done? Without doing all the math, I would suggest that two obvious steps could at least postpone the evil day for at least a decade. One is to end the over-generous annual indexing of benefits, which have risen much faster than inflation, and substitute a more realistic figure for benficiaries, as well as federal employees. A second step is to end the cap on Security taxes, which is currently, I believe, at about $80,000 a year, and which makes the tax even more regressive. That step, of course, has been rejected by the President already.
But the deeper danger, it seems to me, is that the public no longer has the intellectual capital with which to confront these problems intelligently, and Congress and the Administration have therefore become completely unaccountable. That is the only way they could have perpetrated the 20-year "trust fund" fraud. The Bush Administration takes advantage of popular ignorance in other economic areas as well, arguing year after year that spending will decline and revenue will grow at rates for which there is no justification, but recognizing that no one but a few liberal economists will notice when the true figures come out. Nor have the American people paid any systematic attention to the hemmorhaging to blue-collar, agricultural, and now white-collar jobs overseas--a trend which has made our jobs picture almost impervious to economic recovery. Distracted by social issues and a war whose nature is also broadly misunderstood, the American people have lost the habit of intelligently thinking about our problems. Only a catastrophe of deperssion-era proportions, I am afraid,. will restore it--and how much ground will we be able to make up then?


Anonymous said...

The sheer size of this problem is so discouraging that, whether one is ill- or well-informed in general, it is difficult to know HOW to begin to understand it. I found the following comment ("To the editor," NYT, 12/13/04), useful: "Opposition to Social Security privatization is based on arithmetic, not idealogy. ...The economy is projected to grow more slowly, primarily because of slow growth in the labor force. Slower economic growth translates into slower growth in profits and stock prices. Using standard assumptions about the mix between stocks and bonds, private accounts should get a return of less than 3.5 percent...[which] is only slightly better than the 3 percent return on the government bonds, meaning that privatization only adds risk." Is this simple matter of arithmetic beyond the grasp of those Americans whose financial well-being is most directly affected by the Bush proposal?

Anonymous said...

We may have a similar situation of national brainmelt when it comes to drugs. Whether you're looking at imprisoned marijuana smokers, the massive failure of "interdiction", the systematic bullying of doctors who prescribe opioids, or the cost of all of this to the system, it's a disaster. Trying to solve these problems with an electorate that largely believes marijuana is addictive may be as frustrating as understanding the universe with Aristotelian (spelling?- I give up!) models of the solar system. Ye olde Serial Catowner.

Clio Muses said...

It seems at least plausible that the Bush Administration is intentionally leading the nation to a day of reckoning at which time the great unwashed will be "democratically" asked to choose between social services from government and the ability of government to provide security in the face of terrorism.

After interviewing three people of median education and strong religious convictions who professed to relying upon Fox News for their understanding of the world around them and to having profound confidence that President Bush, a good Christian, is in a position to know things they do not and so must be trusted to do the right thing, I am not confident the choice the public will make will be the one that is in their, and our, best interests.