My wife and I may not actually be affluent by Silicon Valley standards. Let’s just say we live comfortably and are able to donate generously to worthy causes.
Why am I telling you this? Because I sometimes feel like a welfare bum. I refer mainly to the Social Security payments we receive, though I could add Medicare benefits and perks like half-price transit fare. Between us we take in about $3,500 per month from Social Security, 85% of which is subject to federal income tax but exempt from California income tax.
“You paid into Social Security,” say well-meaning friends, “so you deserve to collect.”
Readers of this blog, economically astute as they are, will likely recognize the flaw in this argument. Social Security does not tuck your contributions away in any sort of “lock box.” They are not invested in productive enterprises that generate a real return. When total Social Security tax revenue (FICA on your pay stub) exceeds beneficiary payments, as was the case in all but eleven of the years since the System’s inception, the excess goes into a Trust Fund. Trust Fund assets are held in the form of special interest-bearing Treasury securities.
What’s wrong with this picture? Aren’t Treasury securities universally regarded as the safest form of investment, backed by the taxing power of the mighty federal government? No private fund manager or bank manager could be accused of imprudence when investing in Treasury securities. It’s another matter entirely when one branch of government lends money to another branch.
Consider this analogy: a father puts a gold coin in a drawer every year, to be used for his daughter’s college education. One day mother and daughter open the drawer and find a bunch of IOUs. No coins. Daddy has spent them on booze, assuaging his conscience by leaving IOUs which, thanks to his generosity, bear interest. Some “trust fund!”
The excess revenue from FICA taxes is transferred to the Treasury in exchange for new securities, and the Treasury uses it to pay current government expenses. It’s an exaggeration to compare general government spending to the father’s drunken splurge, but not a huge exaggeration. Some tax-funded projects like roads provide real benefits. But a great deal of spending is wasteful and a great deal inflicts horrible damage on society, mainly the endless foreign wars.
In short, the Social Security Trust Fund, like the shiftless father’s “trust fund,” is an accounting shell game, as are the other Federal Trust Funds, roughly 150 in number. In light of this shell game, should Trust Fund obligations be counted in the total national debt, now about $23 trillion? Or, seeing that they are simply sums that one government pocket owes to another, should they be omitted, leaving “debt in the hands of the public” at a mere $15 trillion? The answer: it depends.
It depends on your point of view. Viewing the government from a distance, it makes sense to net out intragovernmental debt and focus on debt in the hands of the public (banks, mutual funds, pension funds, local governments, individuals, foreigners, and the Federal Reserve). Up close one might take the point of view of Social Security beneficiaries who mentally separate themselves from the general population that they believe owes them their due. If we adopt this point of view, Trust Fund obligations should be counted; gross federal debt makes sense.
The Social Security Trust Fund has amassed a balance of some $2.8 trillion mainly because of the massive FICA tax increase of 1983 (thanks, Alan Greenspan, objectivist hero!). But in 2020 the annual surplus is projected to turn to a small deficit that will snowball over time. The entire Trust Fund will be exhausted by 2035, they say, at which time, according to current law, benefits will be cut by some 20%. It’s a sure bet that Congress won’t buck the AARP lobby and let that happen, but they will dither until the last minute before applying some sort of patch.
Prior to 2035, how will the deficits be financed? At first, they will stop re-investing Trust Fund interest income, then stop rolling over maturing securities, then start selling securities prior to maturity. The money will come from the Treasury which must get it from increased taxes, increased borrowing, or indirectly by money printing.
Back in 1970, I asked the late Leonard Read, founder of the Foundation for Economic Education and a man of principle if there ever was one, about collecting Social Security benefits, as he was about to attain the age of eligibility. He hadn’t decided whether to apply. We live in an imperfect world and we must transact with statist institutions to carry on our daily lives. We use the monopoly Post Office or teach at a state university or collect Social Security, even as we may oppose the existence of these institutions. Decisions about such transactions are seldom clear-cut. I don’t know what choice Mr. Read ultimately made, but I have chosen to continue collecting. I expect some day to see Social Security converted to a pure welfare program, at which time I will be shut out because I’m too well off.
Here’s my takeaway: let’s not be too quick to shoot down those who decry inequality of income and wealth. Let’s explain that people like Rockefeller, Gates, or Buffett earned their wealth fair and square while others get rich by getting their hands on the levers of government power. In between are those of us who are accidental beneficiaries of the welfare state. Our obligation is not to don a hair shirt but to understand and explain why these programs should not exist.