Sunday, July 06, 2008

Who will want to "renege" on the Social Security trust fund bonds in the 2020s? 

Who won't?

From a discussion elsewhere that started on another subject and evolved into one on Social Security (as so many econo-blog threads are prone to do)...

Regarding paying down the Social Security Trust Fund bonds:

"In addition, itís hard to believe that politicians will vote to renege on a debt to what is likely to be the most powerful voting block in American history..."

Well let's think about this for a minute. This is a very common comment. But most people who make it are considering the interests of the "seniors" voting block in the past. Try to imagine their voting interests in the future, say in 2030...

As per CBO, seniors (like everyone else) have just been hit with a 35% income tax rate increase from today's levels to pay for their Medicare benefits (this tax landing on their income from pensions, IRAs, Social Security, etc.).

On top of that, they are being hit with another 16% income tax increase for Social Security, mostly to pay off the trust fund bonds. For which they receive nothing, no further benefit. They are not happy about all this!

But they have a simple solution for Social Security: Means test "the rich" out of Social Security to reduce promised benefits by a little more than about 15% total, cuts made at the top, and the entire income tax increase needed to pay off the Social Security trust fund bonds is gone! Social Security continues to be funded entirely with payroll tax as for the 50 years before.

It's the year 2030. Who wants this? Let's take a vote!

[] The great majority of middle-class seniors say, "Why should we pay an income tax increase on our fixed incomes from our pensions, IRAs and Social Security benefits(!) to pay money to Bill Gates and the rich? Yes for means testing!"

[] Bill Gates and the rich say, "Why would we want to pay an income tax increase on all our huge investment and business income to protect our piddling Social Security benefits? Yes for means testing!"

[] Businesses across America say, "Why would we want to pay an income tax increase? Period. Yes for means testing!"

[] The lobbyists for every interest group that gets money from the Treasury -- the Agriculture Dept., Defense Dept., Education Dept., Zoological Dept. -- say, "We want that income tax revenue for ourselves, Yes for means testing!"

[] The young, who are paying the cost of raising children and making mortgage payments, who know they are never going to get back from Social Security what they put in, even without an extra income tax, say ... guess what?

Significant means testing (well disguised) already started in the 1983 Social Security reform. It's being talked of everywhere today ... by Kaus last week, with Pozen-type plans, there's all kinds of ideas for it all about -- and the date for it is still a decade away.

Who is the voting block that figures to vote for imposing a significant new extra income tax on itself to pay down the trust fund bonds?

Unless you can think of a fair bunch of them, it is going to remain entirely plausible to me that Congress will vote by 2030 to change Social Security so that a tax increase needed to pay down those Social Security trust fund bonds will never occur -- because the entire electorate insists!

After which Congress can do what it wants with the trust fund bonds -- transfer them to Medicare to "secure" a previously promised benefit at no net new tax cost, put them on display in a museum, whatever...

Would that be "reneging"?

There's a lesson in all this. Franklin Roosevelt famously said the reason for the payroll tax had nothing to do with economics, "they are politics all the way through". By keeping Social Security's funding "out of the Treasury forever" with its own dedicated funding source, "no damn politician can ever scrap my social security program".

But to the extent Social Security goes back into the Treasury for general revenue funding, via income tax increases, it will no longer be "the third rail of American politics" -- it will be tied to the tracks.