The Great Social Security Embezzlement
By William Tucker
Every writer I know is looking for that dazzling phrase that brings the Social Security situation into focus. (That's what us writers do for a living.)
Clark S. Judge, managing director of the White House Writers Group (a private organization), made a great stab at it in the New York Post on Tuesday. He used the metaphor of Enron. What's happening in the federal government now is exactly what happened to Ken Lay. It's called "co-mingling of funds."
All this started way back in 1968 when Lyndon Johnson was trying to deliver both "guns and butter" and disguise the costs of the Vietnam War. Social Security was then a separate account. It had been running a surplus since it began in 1936--as it will continue to do on until that awful year, now only a little more than a decade away, when the surplus vanishes in 2017. Until now, the only question facing the Social Security Trust Administration has been "What do we do with all this money?"
Johnson had a great idea: "Let's loan it to ourselves." Echoing the 1930s phrase that New Deal economists used to justify growing federal deficits, Johnson persuaded Congress to combine the Social Security Trust Fund (remember that phrase) with the federal ledger, creating one big account. Any overspending in this account could be blandly referred to as the "federal deficit."
Now here's the catch. Because Social Security was running a perennial surplus, its positive balance could be used to reduce the federal deficit. By the 1990s, we were running an annual $450 billion deficit (that's almost half a trillion), but because Social Security produced a $150 billion annual surplus, the deficit could be quietly listed as only $300 billion. Even today, the take from the Social Security payroll tax reduces the federal deficit by about $100 billion. Beginning in 2010, however, when the first baby boomers retire, that $100 billion boost will quickly descend to zero.
You've heard of this kind of thing before, right? It's a situation where there's a bit pot of money--a church bazaar fund or a union pension plan--and then somebody goes to draw on it and suddenly find it's all gone. I remember a highly publicized rent strike in New York where a tenant leader was holding the withheld rents in escrow. Then one day somebody spotted him at the gaming tables in Atlantic City. Poof! The money was gone and the tenant leader vanished. There's a word for it--it's coming to me now--it's called embezzlement!
Since 1968, Congress has been embezzling the Social Security Fund. And it's still going on. Nobody has noticed yet, however, because the fund still runs a sizable surplus. But in 2011 that little kitty is going to start to vanish. In six short years it will descend to zero, revealing a huge, $100 billion hole in the federal budget.
But that's not all. When that annual replenishment hits zero it isn't going to stop. It's going to keep zooming right down below zero and become an annual deficit. The sudden whiplash is going to make Congress think they're riding a cosmic roller coaster. Instead of having a comfortable $100 billion embezzlement to cover its excesses each year, Congress will suddenly be facing a $100 billion Social Security deficit in addition to the no longer buffeted federal deficit. We won't "owe it to ourselves" anymore--we'll owe it to individual pensioners who expect cold cash rather than a scrawled IOU. This mind-numbing reversal has been given the name, the "transition costs."
As Judge points out (and Milton Friedman before him), the "transition costs" are not something President Bush has invented by trying to reform Social Security. They are imbedded in the system. The "transition costs" are the ridiculous over-commitments that Congress has already made for 2040 and beyond brought forward a few decades so we can start dealing with them today in a rational manner. As things stand now, by 2050 tax rates will be approaching 50 percent and more than half the money will be transfer payments to people over 65. (Remember, Medicare, which hits around 2021, will be worse than Social Security). No generation of young people is going to pay taxes under those circumstances.
What does the Bush proposal accomplish? First and foremost, it ends the embezzlement. With private accounts, the Social Security "Trust Fund" will start to belong to individual owners rather than the federal government. If the government wants to borrow (by selling interest-bearing bonds, for example), it will have to make an arm's-length transaction. No more IOU's paying less than one percent and scribbled on a piece of paper in an empty vault in West Virginia.
More important, given the choice, many individual owners won't buy low-yielding government bonds but will put their retirement money funds in mutual funds or corporate bonds and stocks, where it will find its way into the private economy. The hope is that, put to more productive use, this investment money will grow the private economy enough so that, fifty years down the road, we can finally climb out of the hole we have already dug for ourselves.
As with Alcoholics Anonymous, the first step is to admit you are an alcoholic and stop drinking. It's the same with Embezzler's Anonymous. Granted, we've got a long, long way to go on the Twelve-Step Program, but the first step is to admit we've been embezzling and put that money out of reach--right now!
Contributing writer William Tucker is the author of "Right Idea," a weekly column for TAEmag.com.
