Federal Reserve chairman Alan Greenspan was right on the money in his recent calls for action to reduce the federal deficit. The yawning gap in the budget drives up interest rates as government borrowing sucks up available capital, and that threatens future economic growth. He might have added that it makes our allies very nervous to see the world’s mightiest economy managed like a pyramid scheme.
Greenspan was dead wrong, though, to suggest fixing the deficit through future cuts in Social Security and Medicare benefits. Breaking faith with the nation’s frail and elderly is no way to guarantee the future or restore our credibility.
In fact, it doesn’t even address the problem at hand. Our government faces staggering deficits right now — $521 billion in the coming year alone. Greenspan’s Social Security plan is presented as a response to that crisis, but it actually has nothing to with it. What he’s proposing would cut government spending by lowering pension benefits only in the hazy future, after today’s workers have had a chance to make alternative retirement plans. Bringing it up now, as part of the current deficit debate, simply uses a present crisis to sneak in a plug for an ideological hobbyhorse. Conservatives have disliked Social Security since its inception. Greenspan’s proposal is just another potshot at the welfare state.
Social Security was created in 1935 as an independent fund, separate from the rest of government. Taxes are paid into a stand-alone account that exists solely to pay pension benefits. That account is not in deficit. It runs annual surpluses, with contributions greatly exceeding expenditures. Given the aging of the population, the annual surplus will cease within two decades and turn to a deficit. But the accumulated surpluses, saved up in the Social Security trust fund, would be enough to fund the program through most of this century.
The trouble is that the accumulated surplus has been spent. Successive administrations have borrowed from Social Security to make up the shortfall in regular revenues. Accumulated IOU’s from the government to the pension fund now total as much as $1.8 trillion. Nobody has any idea how that will be repaid. Greenspan’s idea — and he’s not the only conservative ideologue proposing it — is to wipe out that debt and make the siphoning of pension contributions into the general budget a permanent fact of life.
Nobody knows this better than Greenspan. He was the chairman of the 1983 Social Security study commission that proposed the program’s current rules — hiking payroll taxes, ensuring an ongoing surplus and phasing in a higher retirement age so that future benefits need not be threatened. His current proposal is simply disingenuous.
Three and a half decades ago — back when Lyndon Johnson was ordering the stand-alone Social Security fund folded into the federal budget to mask the costs of the Vietnam War — workers were paying a payroll tax of 4.4% into the pension plan. Today the payroll tax has risen to 7.65%. It’s twice that if one counts the employer’s share. And the tax is only levied on low incomes. Everything over $80,000 is exempt. It’s one of the most regressive taxes in the federal system.
Income taxes on the highest earners, meanwhile, have dropped during the same period from a top marginal rate of 70% to just 38%. In effect, there has been a massive shift of the tax burden from the rich to the poor in the space of a generation.
There are ways to square the circle: Restore the progressive income tax, lift the cap on the payroll tax, find real spending cuts. Greenspan’s proposal does none of that. It’s just a plan to pick the pockets of working people and retirees so the rich can continue dodging their fair share of the tax burden.