Sunday, August 22, 2010

Kevin Drum Is Still Repeating This Absurd Claim About Social Security

Kevin Drum Is Still Repeating This Absurd Claim About Social Security: "

From Kevin Drum


Bob Somerby is following the latest Social Security chatter and hopes that Paul Krugman can explain how the trust fund works in an understandable way:


The trust fund is just an accounting fiction — a pile of worthless IOUs! Generations of voters have been misled by such skillfully-wrought presentations.


….Krugman is our most valuable player by far — our only player at the top of the press corps. Can he disentangle the trust fund scam in a way average people will understand? We don’t know, and it isn’t his job; no player should be expected to carry the ball on every play from scrimmage. Tomorrow, we’ll offer our own ideas at how the “there-is-no-trust-fund nonsense” might best be approached, in a way average people can follow.


Well, hell, I’ll take a crack at it. Here’s the simple version.


In 1983, when we last reformed Social Security, we made an implicit deal between two groups of American taxpayers. Call them Groups A and B. For about 30 years, Group A would pay higher taxes than necessary, thus allowing Group B to reduce their tax rates. Then, for about 30 years after that, Group A would pay lower taxes than necessary and Group B would make up for this with higher tax rates.


This might have been a squirrelly deal to make. But it doesn’t matter. It’s the deal we made. And it’s obviously unfair to change it halfway through.


This is an incredible fantasy. Absolutely no one thirty years ago (Drum dates the “deal” to 1983) explicitly or even secretly crafted any such deal. Seriously, is Drum really positing that a Democrat-dominated Congress led by for-god-sakes Tip O’Neil really said “lets have poor people pay some of rich people’s taxes for thirty years?” Just last night I was reading a quote from Hitler late in WWII that asserted he actually let the British escape from Dunkirk on purpose because he wanted the British to know he had no real quarrel with them. While it certainly is true Hitler never really wanted a war with Britain, this is just a self-serving rewrite of history. Drum is doing the same thing. Its amazing to me that an obviously intelligent person can convince himself of this.


Here is the real, simple explanation of the Social Security trust fund: Social Security was spinning off huge piles of money and no Congress person of either the Coke or the Pepsi party could resist grabbing it and spending it in a way that would support their reelection. They ended up spending it all. Every bit of it, all gone. The Social Security trust fund is the Enron 401K plan stuffed with Enron stock.


Drum gets to his bizarre theory because he believes the fiscal discipline problem over the last 30 years was all due to tax cuts rather than spending, and that all these tax cuts were for rich people. Of course, throughout the last 30 years, the share of taxes paid for by the rich have steadily risen, so the claim is absurd on its face, but the false assumptions it is built on are ones that every progressive accept as holy writ.


This paragraph is particularly a howler:


The physical embodiment of this deal is the Social Security trust fund. Group A overpaid and built up a pile of bonds in the trust fund. Those bonds are a promise by Group B to repay the money. That promise is going to start coming due in a few years, and it’s hardly surprising that Group B isn’t as excited about the deal now as it was in 1983. It’s never as much fun paying off a loan as it is to spend the money in the first place.


It would be some exercise to try to define groups A and B in a non-overlapping manner. The fact is everyone is in group A, as almost everyone overpays into Social Security on a return on capital basis — the retirement income most people get represents generally a negative net ROI on the “premiums” paid. And it is amazing to me that I have never heard that we now have government bonds that must be paid back only by a specific sub-section of the population. It may very well have been a progressive assumption that only rich people would be on the hook for every dollar of government debt run up over the last 30 years, but that fact will likely be a surprise to just about everyone else in the country. Here is his conclusion:


But pay it off they must. The rich have been getting a loan from the middle class for decades…


Delusional.




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