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What Ronald Reagan had to do with Social Security

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(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.

As far as I can tell, the idea of this vague implied contract was first bandied about during the proposed Social Security reforms under George W. Bush some 20 years later, but I could just be missing earlier references. At any rate, I do not think that you can say that there was a widespread understanding that we were raising payroll taxes in order to give money to rich people in the hopes that they might pay it back later, because if that had been the widespread understanding, it never would have passed. You’re essentially arguing that people were parties to a binding contract they were never told about.

Second of all, let’s take a look at this “deal.” Assume there really was an implied contract. Here’s how it would actually read, stripped of the legal language: “We’re raising your payroll taxes now and putting the money in a trust fund that will invest in special-purpose government bonds. When payments start to exceed taxes, we’ll sell the bonds to the Treasury at par and get some cash in exchange, which will be taken out of the general fund, which is to say, taxes on those rich people we gave the money to in the 1980s. In 2016, the trust fund for disability insurance will run out, and benefits will be slashed by almost 20 percent. In 2034, the OASI Trust Fund will run out, and benefits will be cut by about a quarter across the board. These events may occur earlier, and cuts may be larger, if future revenues fall short.”

Are the trust funders interested in making sure that retirees and disabled people stick to their part of the “deal”? I tried to pin one chap down on this in a Twitter discussion and had no luck. But my basic feeling is: of course not! Humming along and then suddenly slashing benefits is a terrible way to run a program. No rational person would endorse this “deal.” Also, trust funders are generally in favor of not only keeping benefit levels where they are, but also raising them. So what they end up arguing for is a one-sided contract in which Congress, the rich or whoever they think took the other side of this contract has an absolute legal and moral obligation to pay benefits exactly as scheduled until the trust funds run out, but after that, beneficiaries will have an additional right, of unspecified origin, to keep getting benefits.

“The deal,” “the bonds,” “the trust fund” — they’re all political tactics, not serious arguments. Unfortunately, what they are most useful for is putting off discussing how we’re going to fix Social Security.

I come from a school of thought that says “the deal” whereby workers get high benefit levels until suddenly their income drops by 20 to 30 percent is a really terrible arrangement, so we should fix it. Let’s change the system, with some combination of phased-in taxes and adjustments to benefit levels, so that no one ever has to deal with a massive benefit cut. And let’s make it actuarially stable over the long term, so that young workers know what is coming and can plan their retirements accordingly. To us, the trust fund is irrelevant; what matters is deciding how much money is going to go into the government, how much is going to come out, and keeping those amounts roughly in balance.

So here’s a crazy proposal: How about we figure out how to pay for all the benefits we promised, then sit down and have a think about whether there are additional benefits we might also like to pay for? Rather than pointing to untapped taxing capacity as a way to finance new benefits, without asking whether we might need that cash to pay for benefits we already have?

This doesn’t seem that controversial to me, but if you don’t want any benefit cuts ever and think that delaying will mean putting more of the burden on tax hikes, it’s probably better to spend a lot of time talking about whether the trust fund is real.

The exhaustion date of the trust funds has been steadily advancing since the end of the stock market bubble, especially for disability, because the number of beneficiaries has risen dramatically from where it was in the 1980s. 


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