October 22, 2006

The Truth about the Trust Fund-- Destroying Social Security to Destroy the Two Party System

by Thom Hartmann

Excerpted from Thom Hartmanns newest book, Screwed; The Undeclared War Against the Middle Class -- And What We Can Do About It

What do you do when you want to screw only the working people of your nation with the largest tax increase in history and hand those trillions of dollars to your wealthy campaign contributors yet not have anybody realize you've done it? If you're Ronald Reagan, you call in Alan Greenspan.

Taxing Retirement

Through the Golden Age of the middle class-- from 1940 to 1980-- the top income tax rate for the superrich had been between 70 and 90 percent. Ronald Reagan wanted to cut that rate dramatically, to help out his political patrons. He did this with a massive tax cut in the summer of 1981.

The only problem was that when Reagan took his meat ax to our tax code, he produced mind-boggling budget deficits. Voodoo economics didn't work out as planned, and even after borrowing so much that this year we'll pay more than $100 billion just in interest on the money Reagan borrowed to make the economy look good in the 1980s, Reagan couldn't come up with the revenues he needed to run the government.

Coincidentally, the actuaries at the Social Security Administration were beginning to worry about the Baby Boomer generation, who would begin retiring in big numbers in fifty years or so. They were a "rabbit going through a python" bulge that would require a few trillion more dollars than Social Security could easily collect during the same twenty-year period of their retirement. We needed, the actuaries said, to tax more heavily those very persons who would eventually retire; so instead of using current workers' money to pay for the Boomer's Social Security payments in 2020, the Boomers themselves would prepay for their own retirement.

Reagan got Daniel Patrick Moynihan and Alan Greenspan together to form a commission on Social Security reform, along with a few other politicians and economists, and they recommend a near doubling of the Social Security tax on the then-working Boomers. That tax created-- for the first time in history-- a giant savings account that Social Security could use to pay for the Boomers' retirement.

This was a huge change.

Prior to this, Social Security had always paid for today's retirees with income from today's workers. The Boomers were the first generation that would pay Social Security taxes to both fund current retirees and prepay for their own retirement.

And after the Boomers retired and the savings account-- called the Social Security Trust Fund-- was spent, the rabbit would have finished its journey through the python and Social Security could go back to a pay-as-you-go taxing system.

Thus within the period of a few short years, Reagan dramatically dropped the income tax on America's most wealthy by more than half and roughly doubled the Social Security tax on people earning $30,000 or less. It was, simultaneously, the largest income tax cut in America's history (almost entirely for the very wealthy) and the most massive tax increase in the history of the nation (which exclusively hit working-class people).

"You Can't Pay Benefits with IOUs"

But Reagan still had a problem. His tax cuts for the wealthy-- even when moderated by subsequent tax increases-- weren't generating enough money to invest properly in America's infrastructure, schools, police and fire departments, and military. The country was facing bankruptcy.

No problem, suggested Greenspan. Just borrow from the Boomer's savings account-- the money in the Social Security Trust Fund-- and, because you're borrowing "government money" to fund "government expenditures," you don't have to list it as part of the deficit. Much of the deficit will magically seem to disappear, and nobody will know what you did until thirty years in the future when the Boomers begin to retire 2015.

Reagan jumped at the opportunity, as did George H. W. Bush, as did Bill Clinton (although Al Gore argued strongly that Social Security funds should not be raided but instead put in a "lock box"). And so did George W. Bush.

The result is that all that money-- trillions of dollars-- that has been taxed out of working Boomers (the ceiling has risen from the tax's being on your first $30,000 of income to your first $90,000 today) has been borrowed and spent. Left behind are a form of IOUs-- an unique form of Treasury debt instruments similar (but not identical) to the Treasury debt instruments our government normally uses to borrow money.

Paul O'Neill, former Bush Sr. Treasury secretary, recounts how Dick Cheney famously said, "Reagan proved deficits don't matter." Cheney was either ignorant or being disingenuous. It would be more accurate to say, "Reagan proved that deficits don't matter if you rip off the Social Security Trust Fund to pay for them and don't report that borrowing from the Boomers as part of the deficit."

As the Associated Press reported on April 6, 2005: President Bush on Tuesday used a four-drawer filing cabinet stuffed with paper representing government IOUs the president said symbolized the Social Security Trust Fund's bleak outlook for meeting Americans' future retirement needs. . . .

"A lot of people in America think there is a trust-- that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you," Bush said in a speech at the University of West Virginia at Parkersburg.

"But that's not the way it works," Bush said. "There is no trust 'fund'-- just IOUs that I saw firsthand. . . .

"[Susan] Chapman [of the Office of Public Debt] opened the second drawer and pulled out a white notebook filled with pseudo Treasury securities-- pieces of paper that offer physical evidence of $1.7 trillion in Treasury bonds that make up the trust fund."

Later, Senator Rick Santorum made an odd admission for a Republican con: "You can't pay benefits with IOUs," he said on the Senate floor. "You have to pay it with cash."

And where will that cash-- now nearly $2 trillion-- come from over the next decades as Boomers begin to retire?

A Con-made Crisis

Technically (and legally) it's simple: the Social Security Trust Fund will give back its IOUs to the Treasury Department and in exchange for them get cash to pay the Boomers' retirement checks. Practically, though, it'll be a crisis of biblical proportions. For the Treasury to come up with that kind of cash will require either massive tax increases or increased massive borrowing-- at a time when we're already borrowing so heavily that China is propping up our economy with weekly loans.

Thus, Bush talks about a "crisis" in Social Security with some accuracy. But he doesn't dare tell us what the real "crisis" is-- or how Reagan and Greenspan set it up-- because when it becomes widely known that Reagan set the course to steal the Boomers' Social Security savings, it will destroy the reputation of both supply-side economics and the Republican Party for generations to come.

If the cons have their way, however, no one will ever know that they destroyed Social Security. That's because the cons-- who have largely taken over the Republican Party-- have figured out a way to convince young Americans to gut Social Security before the financial crisis begins.

Progressives make the mistake of thinking that today's Social Security debate is about Social Security. It's not. It's about creating single-party rule for a generation or more. To do that Republican cons believe that they need only to grab the hearts and minds of the generation currently under thirty-- and they can do that, win or lose, by properly framing the Social Security debate.

According to exit poll data from the Associated Press, under-thirty voters were up more than 9 percent in voter participation in 2004, bringing 4.6 million new young people to the polls just since 2000.

And, as Martha Irvine of the Associated Press noted in an article in USA Today the week after the 2004 election, "This time, young voters were the only group that favored Democrat Kerry. The AP's exit polls found that under-30s favored Kerry over Bush, 55% to 44%."

This was not lost on the Republicans. As Irvine noted in her article, even safe-seat Republican U.S. Senator Chuck Grassley of Iowa designed an entire ad campaign "targeting young people."

And many among this young demographic-- the first generation in more than 200 years raised in schools largely unable to teach civics and American history both because of budget cuts and fear of claims of "liberal bias" from conservative fanatics-- are politically naive and ripe for the picking.

Those under thirty don't remember-- or, largely, don't even know-- that the leading causes of death among the elderly, the widowed, and the disabled after the stock market crash of 1929 included starvation and hypothermia. Before Franklin D. Roosevelt instituted Social Security in 1935, the majority of America's elderly lived in poverty. Today it's 11.9 percent, but take away Social Security and today's elderly poverty rate would be 47.6 percent.

These are statistics that the Republican cons and their corporate media will not be sharing with people under thirty.

Thus, as David King of Harvard's Institute of Politics told the AP's Irvine of the young vote: "I think that young people are there for the taking."

Joseph Stalin's year for the final consolidation of single-party rule in Russia was 1927, and that rule lasted more than fifty years. American cons are planning for a similar fifty-year horizon and intend to use "age warfare" as a tool to bring young people along.