Saving Social Security

Feb 13, 2020 · 5 min read
Photo by Elien Dumon on Unsplash

Make no mistake about it; Social Security is called Social Security, because it is a socialist program. As the architect of the program, FDR would certainly have seen himself as something of a socialist as well. Social Security is a socialist program originally championed by a socialist president. However, Social Security as it exists today is not the pay-as-you-go old age pension for retired workers envisioned by Roosevelt.

To salvage Social Security as a pillar of an American social safety net, it needs to return to its original model as a “pay as you go” program. Social Security is no longer FDR’s vision, but represents a conservative reworking of a socialist program too popular to legislate away. Anti-socialist crusaders could not kill Social Security outright and instead planted a time bomb to destroy it.

A simple rule change to remove the cap on when income is subject to the Social Security tax would go a long way to balancing revenues with outflows. Currently, the Social Security Tax is only on the first hundred thousand or so of income, anything above that is tax-free as far as Social Security is concerned. Of course, most Americans never see this enormous tax break. If the average American knew the background on how Social Security was restructured in the eighties they would see no reason that so much income should be exempt. Nonetheless, such a simple rule change is widely opposed by moneyed power.

In 1980, Ronald Reagan was elected on promises to cut government overspending. The idea of cutting taxes to raise revenues was known as the “Laffer Curve”. The “Laffer Curve” stated that cutting taxes increases economic activity. This increases revenues in the form of increased tax receipts due to the increased economic activity. The eighties are often pointed to as proof of this economic principle. However, the increase in tax revenue under Reagan was due to a straightforward increase in taxes on closer inspection.

Reagan’s cutting of the tax rates in the United States has entered into American mythology. To the unobservant, it appeared that Reagan’s budget and tax code rework was a tax break. Historically, this tax break has been trumpeted as massive. However, when one looks more closely at what the Reagan administration did in the eighties, the tax break is far less impressive.

Normal income tax brackets were standardized and overall income taxes were lower, that is true. Largely unreported was that Social Security taxes were expanded to affect more Americans. This is actually a shifting of tax burdens to the lower income brackets, because Social Security is only applied up to a certain income level. Most Americans never see their income exceed the amount that is subject to the tax.

The rich and well-off not only enjoyed an income tax cut, but had a large portion of their incomes exempt from Social Security tax. By expanding the number of workers subject to the tax, increasing the retirement age and instituting a tax on Social Security benefits tax revenues increased. However, the revenue increase for the social program’s support was shifted to the lower income brackets.

Social Security had been a “pay as you go” program, but under the Alan Greenspan rework of the tax code, Social Security began collecting more taxes than it needed to meet its obligations. Yes, standard income taxes did go down under Reagan. There is no doubt of this fact. This served as a massive tax cut for the rich, in fact. However, it was a pittance for the middle class and poor due to the large increase in Social Security taxes. To top it off, none of the Social Security’s extra revenue was actually protected from use in the general fund though.

Income taxes went down but Social Security taxes went way up in the decade of the eighties. The Reagan tax changes specifically brought in more revenues on the backs of workers and they have been paying ever since. The revenue increase was not due to the “Laffer Curve” as was claimed at the time but rather due to this increase of the tax burden on lower income brackets.

This is the true legacy of the Reagan/O’Neill tax reform to save Social Security. A disproportionate amount of the tax burden was shifted to the wage earners with the promise that the extra tax dollars being collected would be saved in a Social Security Trust Fund. The Speaker of the House during the Reagan years, Tip O’Neill, a Democrat, was instrumental in getting these changes through the Congress. The fact that a Democrat was so instrumental in pushing this through Congress simply serves as more confirmation of the political duopoly.

America’s elected leaders have been removing the money from the Social Security Trust Fund for some time now. During the Clinton years, the much vaunted surpluses were actually due to this over collection of Social Security taxes. That money has been allegedly invested in special government bonds. In reality, the Social Security Trust Fund is actually empty having been spent on the Bush/Cheney upper income tax cuts, invasions and occupations of Afghanistan and Iraq, and numerous military engagements all across the globe.

There is now a big fat IOU sitting in that account in the form of government bonds. The most recent tax reform of 2017 puts in doubt whether those IOUs can be redeemed. The stealthy shifting of the tax burden into a trust fund to pay for future benefits allowed the government to have a much greater day-to-day cash inflow. The excess tax revenues could now be spent by looting the Social Security Trust Fund replacing dollars with IOUs.

Reagan’s mythical tax cuts have actually confirmed Keynesian economic ideas. All throughout the eighties, the government ran huge deficits even with the extra cash the new Social Security revenues brought. There were huge increases in defense department spending with no cuts elsewhere to pay for these increases in revenue outflow. The greater government spending led to an economic boom in the eighties just as the great socialist economist John Maynard Keynes predicts.

This tax system has clearly benefited the very wealthy far more than it does average Americans. After nearly forty years, Americans see enormous income and wealth inequality compared to the situation before the Reagan/O’Neill deal which put Greenspan’s tax code rework into law. The 2017 tax reform is even more lopsided in favor of the wealthy, so we can expect only more and greater inequality.

Americans want these entitlement programs to go on despite the financial obstacles and despite the fact they are a pure expression of socialism. Americans need and want a social safety net. Working Americans are owed these dollars. Americans want unemployment and disability insurance, along with Social Security and Medicare.

Despite these wants and desires, America’s politicians are always talking about the cost of such things. However, they rarely discuss the costs of tax cuts for corporations and billionaires or the costs of the endless Global War on Terror. Clearly, there are choices and priorities being set which are not being transparently determined by the electorate, but rather are determined by backroom deals among moneyed power brokers.

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