January 19, 2005

Deadbeat Dads And The Trust Fund

Imagine, for a second, that I'm a father. Call me Vlad. And imagine that I have a daughter Nell—an adorable brown-eyed cherub, my pride and joy, that sort of thing. Okay, now imagine that I'm a software engineer, and thanks to outsourcing, I'm scraping by on $30,000 a year. Meanwhile, little Nell's dream is to go to a top-notch Ivy League college, and since I can't afford it at my paltry salary, at the age of 8 Nell decided to start working as a seamstress in the local sweatshop (hey, the NLRB ruled it was okay!), bloodying her fingers to make Nike shoes at a wage of $3,000 a year. Every payday she gives me the check, which I'm supposed to deposit for her in an account that we like to call... the College Fund.

Now when Nell is about 8, I decide that I don't really want to work as hard as I've been doing. But it's hard to cut back on work and afford my present lifestyle, since expenses come to exactly $30,000 a year. What to do? Oh hey! I can just take little Nell's $3,000 a year, use it to cover my current expenses, and then promise to pay her back (plus interest) when graduation rolls around. Voila! I can now effectively scale back my work hours by 10 percent and maintain my standard of living. It's a brilliant plan!

Okay, flash-forward ten years. Nell just got accepted into Harvard, to become a poet (being a girl she has no aptitude for math or science, naturally), and she needs her College Fund to pay for the tuition. "Ah, Nell?" I say. "We need to talk. The College Fund doesn't really exist. Heh."

"Um, WTF?" says Nell. "I gave you the money and you promised to pay it back. What are you going to do, default?" She reaches for the phone to dial 911.

"No, no. No default! Hehe. No!" say I, fidgeting a bit. "What I mean is that the College Fund has no, um, economic significance. Yeah! Look, the money's not there in the bank. That's a fact. So either I suddenly have to start working much, much more in order to pay for Harvard, or else you're going have to readjust your expectations and find a school that you can afford on your current salary."


"But it's okay! Look, Nell, this is precisely what would have happened if there was no College Fund at all. It's the exact same situation! Now let's look at these brochures for SFSU..."

Okay, corny dialogue aside, look. If I had really told Nell not to apply to Harvard and instead apply to the cheap community college down the street—all because I didn't want to work more—I would be condemned from every corner. Not just condemned; skinned alive. After all, I siphoned off Nell's money for ten years all so I didn't have to work as hard, so by rights I should now start working my ass off to pay for the Harvard education Nell was promised. Morally, that should be clear to anyone.

And yet Tom Maguire (who is usually top-notch on this subject) apparently thinks that the "deadbeat dad" logic has some allure! Consider what he says about the Social Security Trust Fund—namely, that it has no "economic significance":
Imagine that we come to 2018, and Social Security payroll tax receipts are less than legally mandated benefits. Because we have a trust fund, what happens? The Soc Sec Administration collects interest from the Treasury on its "assets", turns around, and says, we need the cash to cover the benefit checks we are writing. The Treasury then makes a payment to the Soc Sec Administration from the general fund. To cover this, the Treasury must, working with Congress, either (a) run a surplus in other funding; (b) increase outstanding debt, (c) reduce other spending, or (d) raise new taxes.

Now, imagine that we did not have a trust fund. Congress has still mandated a certain level of benefits for 2018, and the payroll tax will not be sufficient to cover them (under current projections). Consequently, the Soc Sec Administration will go to the Treasury to cover the shortfall. And to cover the shortfall, the Treasury, working with Congress, will either (a) run a surplus in other funding; (b) increase outstanding debt, (c) reduce other spending, or (d) raise new taxes.
Notice anything, ahem, familiar? Nell, get the phone...

Here's the deal: Over the past 20 or so years, Social Security has run a surplus, receiving more in payroll taxes—largely from low- and middle-income Americans—than it's paid out in benefits. In fact, this was all explicitly arranged by the Reagan administration. Now the program has taken that surplus and invested it in U.S. Treasury Bonds. The federal government has then taken the money and used it for a variety of spending—whether it be Bush's enormous tax cuts, or paying down the deficit, or fighting wars in far-off countries, or what have you. It doesn't really matter.

The point is that the government has used payroll taxes all these years to keep income taxes lower than they otherwise would have been. That's the crux. Had the Social Security surplus been invested in something else—private equities, for instance—then the federal government wouldn't have been able to get its grubby fingers on all that money, and we would've either had to raise income taxes or lower spending all that time.

So the only proper and moral thing to do is to raise income taxes in order to pay back the Trust Fund, preferably starting now. Slashing benefits in 2018 because we "don't really have a Trust Fund" would be like telling little Nell that she had to go to SFSU even though she saved up all that money all those years. It would be a massive transfer of wealth from low- and middle-income earners to high-income earners (who primarily benefited all this while from having income taxes lower than they otherwise should have been). According to Dean Baker, a default would mean that "more than $1 trillion (in 2001 dollars) would be transferred from the bottom four quintiles to the households in the top 5 percent of the income distribution." Heist of the century.

But seirously. The only "problem" we'll be forced to face in 2018, if we continue on our present course, is the fact that Bush passed a series of tax cuts in 2001-04 that the government couldn't afford. But that's not our retirees' problem, just like my enthusiasm for long walks on the beach isn't little Nell's problem—it's mine.

Anyways, I'm done now, except for two other points. One, according to CBPP, the Social Security shortfall will be less than 10 percent of the general budget deficit in 2018. So again, whatever "crisis" may come that year has very little to do with SS. The second point here is that Bush's privatization plan—at least if it follows the CSSS Model 2 plan—will only exacerbate our Trust Fund problems even further. So if you truly think 2018 is going to be a crisis, privatization will only make the problem worse.

Update: Edited a wee bit.
-- Brad Plumer 3:12 AM || ||