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.

  • dr kill

    I can see why you perseverate on this dickhead. Where does he tend bar?

  • http://stuffmarkthinksabout.blogspot.com Mark

    That and, how many poor people from group A in 1983 are rich members of group B today? Doesn't this "deal" ding them twice? Finally, I was born in 1983 so obviously I wasn't able to consent to this deal. Who is we?

  • me

    "The Coke and the Pepsi party"... truer words were never spoken. Thanks for making me chuckle :)

  • Don Lloyd

    "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."

    It was worse than this.

    If memory serves, for every dollar Congress received fron SS, they self-induced themselves to spend $1.72.

    Regards, Don

  • Sean

    There's another argument that I love from defenders of the Social Security status quo:

    "There is no crisis. Even after running a deficit the Trust Fund will last until 2040+. And at that point we can still pay for 75% of current benefits."

    At which point I think: The latter two sentences do not go along with the former. Perhaps if the first statement were "There is no immediate crisis," I would agree.

    But there's some blase attitude which I liken to living in an apartment beyond your means. Sure you can't pay for rent indefinitely, but you can pay out of your savings for a good 3 years before it runs out. And even then, you keep paying 75% of the rent beyond that point.

    Australia has a perfectly good privatised Social Security system. Although none of the Ozzies I know want to use the language, their system is beyond even what Bush and the Republicans proposed last time around. And the Republicans would have done well to point out that system, or at least re-name their proposal to match that of Aus. It would also shut up a lot of the Social Security reactionaries who portend all sorts of evil results from that system.

  • txjim

    I have to tip my hat to you Warren, You react to such nonsense with aplomb. Me? When I read that crap I go straight to "hit bad man with big rock".

  • dearieme

    Your lefties are very odd. The British equivalent of Social Security is called National Insurance; it was a left wing politician who said, in the late 1940s, "The secret of the National Insurance Fund is that there ain't no fund". But still your lefties prefer to discuss such things in terms of fantasies.

  • http://www.pugsofwar.blogspot.com BlogDog

    As Karl Denninger recently noted at The Market Ticker, the use of the word "bonds" for what's in the SocSec "Trust Fund" is an outright lie. Bonds can be traded. The "bonds" in the fund can *only* be redeemd by the Treasury which means they are not bonds but IOUs. And there is no money in the hands of those who "borrowed" the funds paid into SocSec for all these years .
    This is a scam of such magnitude it beggars Enron's fancy accounting and Madoff's scheme and pretty much every financial scam run on this nation since its inception, combined.

  • wilky

    The best way to explain how the trust fund works in an understandable way? Its a ponzi scheme and those that keep pushing it should be spending some years with Bernie.

    No weekends for you.

  • http://www.freemktproject.com Pat

    What Mark said. As Thomas Sowell points out time and again, the people who want to divide us into income brackets completely ignore the fact that the brackets will always remain the same (there'll always be lowest, middle, and upper brackets), however, the people in them will change. The IRS, as Sowell points out, actually tracks individuals and their movement through the brackets. It's highly changeable, and the biggest change is from the lower brackets to middle and upper as through a person's lifetime they gain experience, expertise, perhaps strike out on their own, and their pay goes up with their productivity as a result. How many of us left high school or college and went straight to the middle class in our first job, let alone the upper bracket? People also shift up to the upper bracket and back down.

    Talking about income brackets as though the living people within them at any snapshot moment in time is as stable as the existence of the bracket itself is a convenient rhetorical tool, but it doesn't reflect reality.

  • Larry Geiger

    SS is a tax. It is welfare. We tax current workers to pay for current "retired" people. Old people tax their children so they can drive down to the "adult" arcade and sit in there and play simulated Vegas games all day. Our current state of affairs is not really catastrophe, crisis or disaster. Our current state of affairs is pitiful.

  • mark ii

    The reason why Democrats do not want to privatize Social Security is that it is a huge transfer from the rich to the poor. Poor individuals get a huge return from Social Security if they live to receive it.

    The same is true for Medicare. A person who makes $100,000 a year will have made "contributions" of $5900/year into Medicare. The future value of 20-30 years of that level of contribution covers the future value of their medical expenses and then some.

    Poor people, on the other hand, get multiples of the value they have ever contributed the first knee replacement they get.

  • http://mangyredbonehound.wordpress.com/ mangyredbonehound

    Drum essentially assumes that the wealthy in 1983 are the same people as the wealthy in 2010. In the United States, people can and do move fluidly through the ranks of relative wealth (in both directions).

    And who were the parties to this grand bargain?

    I am fairly certain that Drum would consider me, for example, to be among the well-off. Lord knows I pay a lot of federal income taxes. But I was in high school in 1983, being supported by middle class parents. I could not even vote yet. How could I be bound by an “implicit deal” between other people?

    Delusional is right.

  • Dr. T

    Why would a sane, intelligent person read anything written by Kevin Drum? He's too partisan to be objective and too muleheaded to admit errors. Since he's seldom right and seldom backs down when confronted with mounds of evidence that he's wrong, there's no point in discussing his idiotic rantings.

  • Dan

    Drum was pretty well beaten in the comments on his blog. The real problem is Paul Krugman giving the same lecture from the NYT and other bully pulpits. Not that I find him more credible, but that Nobel Prize hanging from his neck gives him near-papal infallibility in the eyes of the left.

  • Ted Rado

    Proposals to privatize the social security system assume that the money will be invested in the stock and bond market. The problem is that the total earnings of the stock and bond markets are not adequate for this to work.

    In a similar vein, the growth of stock prices must at some point equal the growth of the GNP. If earnings grow at 14% and the GNP at 3%, earnings will equal the total GNP in 40-50 years. This obviously can't happen. Earnings must at some point level off at some percentage of GNP, after which earnings percentage growth will equal GNP percentage growth. It raises interesting questions re the financial and pension systems a few decades down the road.

  • Max

    Actually, as an avid war-history fan, I have to disagree. Hitler never wanted the UK to be his enemy, he even admired them. He hoped to gain their trust and aid. He believed in this so strongly, that he even preferred attacking Russia than to try to invade GB (which was not easy, but could have worked). He even sacrificed his Northern Africa positions to punish Russia (which he believed to be the last hope of the English - surely after he finished russia the english men and women would conced that further war was useless).

    All his pre- and mid-war strategies centered around NOT attacking Great Britain. He was fascinated and angered by the continued resilience and resistance of the English people (which might be one of the most commendable deeds of WW II). So, I don't think it is a rewrite of history in any case...

  • mark ii

    Max,

    Hitler invaded Russia to knock Great Britain from the war. Eliminating the Soviet Union would have removed the last possible potential European ally for England and made it impossible for Great Britain to win the war, even with the participation of the United States.

  • markm

    Max, it's true that Hitler didn't make plans in advance to invade England or apparently any plan considering the possibility that the Brits if the Brits wouldn't make peace after France fell, but false that he never intended to invade. The Battle of Britain was intended to knock out the RAF so a cross-Channel invasion could proceed with air cover compensating for the British naval superiority.

    And when that failed - that is, when it became clear that in daylight bombing and dogfights over Britain, the Luftwaffe was getting whittled down far faster than the RAF - Hitler switched to nighttime terror bombing, mainly of civilian residential neighborhoods. What a way to show his friendship for the English people!

    I think that the Germans could have won right after Dunkirk, if they had been ready and willing to stuff 100,000 troops into small boats for a "hail Mary play". If all those boats crossed at night simultaneously at many places along the Channel, it's unlikely that the Royal Navy could have sunk more than half. The BEF left their weapons on the beach at Dunkirk. Unlike the USA, there was no reserve of rifles in civilian hands, nor in storage. For a few weeks, as little as 50,000 men could have conquered much of England, even if they were cut off from resupply and split into battalion or company units.

    But that operation would have had to be run along very un-German lines. Each troop would get a rifle, a knife, and a heavy backpack full of ammo, and virtually nothing else. If they made it to an English beach, they'd have had to live off the land, commandeering food, transportation, and even clean socks. And there wasn't time to count up the boats and make a plan for the attempted crossing - it would be fan out, grab any boats you can find and can bring along the coast to the Channel in a few days, and then load and go. Units wouldn't have been assigned specific objectives, because there was no knowing which ones would make it. The boats would have carried a full platoon at best, and often just a squad, and they'd have scattered all over in the crossing. Squads and platoons would have had to link up with others after landing to form larger units, and then pick the objectives they were in a position to cover.

    American and British paratroop units functioned under similar conditions after many of their drops. But that was only for a few days, and with elite forces of a considerably smaller size than this invasion force. I think it would be possible to pull off a similar operation with American troops of the era, who often showed quite unmilitary imagination and flexibility once they realized that the plans had gone to hell and there wasn't time to get new orders from HQ. German troops could have been as capable - if their commanders had ever trusted them enough.

    But once the Dunkirk evacuees were re-armed, an invasion was a whole different matter. Sneaking a barely organized force across in the night wasn't sufficient any more. The invaders would have to be capable of a sustained campaign against a small but top-notch military organization, in a hostile country. The original invasion would have to be protected and guided well enough that it was still an army Corps when it landed, not a collection of disconnected small units. Resupply would be needed, so sea lanes would have had to be forced open again and again. It's just possible that if RAF Fighter Command had been neutralized, the Luftwaffe plus reckless expenditure of U-boats and torpedo boats could have sufficiently impeded the Royal Navy to allow this. But after the Luftwaffe losses in the Battle of Britain, it just wasn't possible to protect a mass of boats or landing craft.