(Bloomberg View) — Lotteries have been described by waggish statisticians as “a regressive tax on people who can’t do math.” I am beginning to think something similar about Social Security’s trust fund: It is a regressive tax on the brains of people who have never studied accounting.
If you want to spend a hilarious and illuminating 15 minutes, try to convince a financial analyst that the Social Security trust fund exists and is important. This is what they will tell you: “It’s a consolidated entity. The treasury bonds in the trust fund are an asset of one part of the government and a liability of the other part. Net effect on the balance sheet: zero.”
What advocates of the “trust fund as obligation” story are trying to do is make that asset and liability transitive to parties outside the government; they speak as if the bonds are assets of, and liabilities to, beneficiaries themselves. This is not legally true. Flemming v. Nestor decided that in 1960: You have no contractual right to Social Security benefits.
Why does this matter? Because if you had a contractual right, the courts would step in to ensure that you were paid benefits. Due to various provisions of the Constitution — notably the Takings Clause and the 14th Amendment – the government has very limited ability to rewrite the terms of contracts it has entered into with other parties. Bondholder Pete Peterson has a contractual right to be paid the interest on the bonds. So if you, a hardworking American citizen who is duly paying your Social Security taxes, had a contractual right to benefits or the interest on those bonds, then this would be legally meaningful. But you don’t. What you have is a legal right to benefits for which you are eligible. But you have no protection against Congress changing that law — just the political protection afforded by the popularity of Social Security.
It is trivially true that under current law, you have a right to collect benefits until Congress changes the law, or the trust fund runs out of special-purpose bonds and cuts the benefit level. But this is not what people are trying to say when they invoke the sacred trust fund: They are trying to say it means that you cannot change the law. Legally, this is nonsense.
As a fallback, the trust funders say that the bonds convey some sort of moral obligation. We made a deal with people, they say: higher taxes in the 1980s and onward in exchange for promised benefits. Because the program was overfunded in the early years, a significant chunk of those (regressive) payroll taxes helped fund Ronald Reagan’s tax cuts for the wealthy. Now that it’s their turn to pay higher taxes to fund Social Security, they’re trying to welsh.
This is manifestly unconvincing for several reasons.
First of all, the idea that workers somehow explicitly cut a deal to pay more payroll taxes now, give the money to rich people, and then get it back later in the form of higher income taxes doesn’t really hang together. The timeline is wrong, for one thing; the first round of Reagan tax cuts preceded the Social Security deal by several years. Also, since “the rich” in 1983 and “the rich” today are not the same group, it’s hard to see how the former could make any sort of agreement binding on the latter.