Jack Rasmus

A recent reader of this blog raised an important question. He asked: “In what year did the US Treasury begin to raid the Social Security Trust Fund, and Why”.

This question is of such importance that I am reproducing it, and my reply, here as well as having done so to the reader:

“I don’t know the exact year, but I’m sure it was soon after the 1986 changes to the Social Security Act were enacted. (The chair of the commission that recommended the changes, supported by Democrats and Republicans in Congress alike, was none other than Alan Greenspan. For his ‘loyal work’ for Reagan, he was then appointed Federal Reserve chair as James Baker, who was then running the government de facto as Reagan mentally deteriorated, pushed out prior Fed chair, Paul Volcker. Volcker refused to cut interest rates dramatically in order to puff up the stock market and he was removed.)

So much for ‘central bank independence’ once again.

Greenspan went on to provide increasingly excess liquidity and free money to bankers for the next 20 years. That fueled ultimately the financialization of the US and global economy by the 21st century that led to increasing financial asset bubbles and financial instability, culminating in the 2008-09 global financial crash. (Bernanke, Yellen and now Powell–after a brief 2 yr. reversal in 2017-18–now continue that tradition of free money and subsidization of capital incomes by means of monetary policy.

The 1986 social security act changes dramatically raised the payroll tax for social security (retirement, SSDI, etc.) and indexed the rate rise to inflation, and raised the retirement age to 67. But it continued to place a ‘cap’ (subject to the indexing) on the highest incomes that would have to pay the payroll tax hike. This was done in order to protect those with even higher incomes from capital or the highest wages (high income professionals, managers, etc.) from paying the tax once a high threshold in their wage incomes was reached.

As a result of these 1986 changes, the social security trust fund began to accumulate a surplus every year. That surplus would reach $4 trillion by the 21st century first decade. The ideological argument made to justify the payroll tax hikes was that it would be needed when the 78 million baby boomers began to retire after 2010-12. But the US government ‘borrowed’ the real wage tax payments deposited in the trust fund from the payroll tax hike every year nevertheless. It ‘replaced’ the borrowed funds with special issue Treasury Bonds. (It did the same borrowing from federal workers’ pension funds). This ‘borrowing’ is what the phrase ‘the government borrows from itself’ to finance the debt means. Of the current $21 trillion or so US federal debt, between $5-$6 trillion I believe is what the government has ‘borrowed from itself’. The other $15-$16 trillion has been borrowed from private investors, banks, corporations, foreign central banks, investors, etc. etc.

This massive theft from the social security trust fund (and it is theft because, in a crisis, the government cannot convert the sale of those special bonds deposited in the fund back to real dollars with which to continue to make retirement payments) enabled the US government to create ever larger US government budget deficits by cutting taxes repeatedly on the rich, investors, corporations and businesses, while simultaneously spending trillions of dollars on wars in the middle east, and, thirdly, while allowing the big pharma and health industries to gouge medicare and other government health programs with chronic excess price increases. These three sources are the primary contributants to the national debt.

One should think of the social security program and social security monthly benefit payments as a form of workers wages. It is what I call the ‘social wage’. It is deductions from wages to be paid back in the form of social wage, retirement benefits upon retirement. By borrowing and spending the trust fund surplus on tax cuts for capital and war spending, the government is in effect acting as a redistributor of wage incomes back to capital incomes (in the form of tax cuts and war spending and pharma-health industry subsidization). You won’t find that in government stats on estimating wage levels or wage change. Nor in considerations of causes of income inequality that keeps accelerating in the US. But the atrophying of the social wage is a major factor in growing income inequality, since wages (actual or social) are workers’ primary source of income.

Since the 2008-09 crash the US government has been ‘borrowing down’ the trust fund, or else using it (as did Obama) to divert the payroll tax in part to try to boost wage incomes and consumption by households during his abysmal ‘recovery’ period after the crash. But all Obama did was accelerate the decline of the social security trust fund. Nonetheless, today it’s still positive around $3 trillion. But at the current rate is expected to be used up by 2035 or so. After that social security payments will be financed roughly 80% and only out of current payroll taxes. That could last until 2075 or so.

Therefore, at some point another Greenspan-like Social Security Commission will be tasked to save social security again, a la 1986. It will then likely raise the minimum retirement age eligibility to 70 years (and early retirement to 65 or more from the current 62). Disability and survivor benefits will also be likely reduced. These changes were already proposed in 2013 by the (Senator) Simpson report and recommendations. They were prepared to restructure it along the above lines back then, but the changes didn’t make it into the so-called ‘fiscal cliff’ deal signed by Obama and the Republicans in December 2013.

But it will soon be ‘dusted off’ and proposed again, soon after the 2020 election regardless who wins. As in 1986, once again they’ll say they’re ‘saving’ social security by gutting it. They’ll also likely try to legally allow the fund to invest in stock markets, which they’ve been trying to enact since 1997. (Making the bankers happy, who will manage it all).

What capitalists have wanted since Reagan is to privatize social security, in effect destroying it as a social retirement system and converting it to a private pension program, as they previously have done with business-union defined benefit plans converted to phony 401k private contribution pensions. Privatizing of course means bankers and their buddies get their hands on the fund to invest to their benefit.

Social security could, and should be reformed, but without privatization. This can be easily done by simply raising the ‘cap’ on earned incomes (now about $125k a year or so). Applying the payroll tax to all earned (e.g. wage incomes without a cap). And applying it to forms of capital incomes (interest, rent, royalties, dividends, capital gains, inheritance, etc.) as well. And of course, any reform must stop the government from ‘borrowing’ from the fund annually. That absolute prohibition of government borrowing from the Fund would make force government to reduce its business tax cutting and war spending.

My previous studies showed that these proposals could raise trillions of dollars for the Social Securityi Retirement Fund. The retirement age could be lowered, not raised. Or benefits increased, not reduced. Or in lieu of lowering retirement age or raising benefits, there might even be even hundreds of billions left over–to fund ‘medicare for all’ in large part. Medicare is also part of Social Security but paid for out of other funds, Parts A,B, D. If what’s left over in tax revenue is insufficient, the rest of the cost of Medicare for All could be funded by a financial transaction tax, as I’ve proposed and estimated elsewhere as well.

But you won’t hear Democrats calling for any of that. The originators of Medicare itself in 1965, the Democrats no longer really support it–at least the Democrat Party leadership and their pundits and media outlets. Medicare for All for them has been reduced to the so-called ‘public option’ that is really a government insurance program that will leave private insurance companies on the health care field intact, to continue to do their damage. Except for the new progressive wing, the leadership and moneybag wing of the Democrat Party give Medicare token lip service but have no real plans to improve it. Their plan is to undercut the call for Medicare for All and propose the public option in order to minimize insurance company lobbying and opposition.

Of course, Medicare for All is anathema to Republicans and their bigger moneybags behind them. They’re the ones, not surprising, directly calling for cuts to Social Security or trying to label the program as ‘Socialism’–along with free public college tuition, green new deal, and tax recovery from the rich and their corporations. It’s the right wing’s new ideological offensive against social security now cranking up from Republican and right wing think tanks and their cable-radio news counter media.

But I’ve been predicting this ideological (and policy) offensive, now emerging, for some time. The massive subsidization of capital incomes that has been occurring, and accelerating, for at least two decades now by means of fiscal policy (tax cuts for business and rich) and monetary policy (free money from the central bank, the Fed) is creating its own fundamental contradictions. It’s not just income inequality that both produce. It’s that the use of fiscal-monetary policy for growing subsidization of capital incomes is creating a dangerous level of debt and eventually unsustainable level of interest payments on that debt. The elites plan to reduce the debt by attacking social security. It’s either that, or stop tax cutting on capital incomes or reduce war spending. They won’t do the latter; they plan to do the former.

Along with annual $1 trillion war spending, the $15 trillion in tax cuts for capital incomes since 2001 has now produced a $21 trillion plus government national debt. Projected $1 trillion a year or more further budget deficits will balloon the US national debt to $34 trillion by 2028. (Add another $5 trillion for state and local debt and the current $4 trillion in Federal Reserve debt plus other government agencies’ debt, and you have by the next decade around $50 trillion or so in total debt. And that’s not counting either the current $13.5 Trillion in household debt and nearly $10 trillion in corporate bond debt even today and going higher).

The Congressional Budget Office research staff has estimated that even at the conservative estimate of the rise in just the US government debt, the cost of interest on the national debt alone will exceed $900 billion a year by 2027. (More if there’s a recession, which there will be and sooner rather than later).

Neither wing of the Corporate Party of America (aka Republicans and Democrat party elites) will address this looming debt crisis. Republicans will keep cutting taxes for capital incomes and escalating war spending; Democrats will continue war spending and will enact (if Senate Republicans allow them) token hikes in capital income taxation. But don’t hold your breath or expect that any of the latter will ever go to address social security or the diverting of the $3 trillion remaining surplus to help offset the annual $trillion budget deficits and additions to the national debt.

Both wings of the CPoA will ‘address’ social security shortfalls by raising the retirement age dramatically to 70, reducing the annual inflation adjustments, cutting SS disability payments (already occurring), and–once again as under Greenspan–raising the payroll tax itself in order to continue diverting the surplus to service the rising US government budget deficits due to tax cuts and war spending).

But it could all be resolved simply by: 1. eliminating the ‘cap’ on taxable wage incomes; 2. taxing capital incomes at the payroll rate; 3. preventing the government from ‘borrowing’ from the social security fund. (By the way, the borrowing from the fund was disallowed in 1990 legislation, but Congress suspends that rule every year and grabs the surplus, replacing it with phony special issue Treasury bonds that can’t be resold to raise cash when the fund surplus runs out).

For more on all of this, which I’ve been writing on for years, see my chapter on Social Security in my 2006 book, ‘The War At Home’, as well as numerous magazine articles I’ve written on it thereafter now also located on my website (http://kyklosproductions.com) written during the Obama period. Since 2013 I have been commenting on this topic as well on this blog.The Social Security theft and financing topic is also addressed in my forthcoming book, ‘The Scourge of Neoliberalism’, Clarity Press, summer 2019, as an integral element of neoliberal industrial policy).

Jack Rasmus
April 29, 2019