An epic scam across decades

In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:

"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."

Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.

The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.

In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

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.

So who is Group A? It's people who pay Social Security payroll taxes, which mostly means working and middle class taxpayers. And who is Group B? It's people who pay federal income taxes, which mostly means the well-off and the rich. For nearly 30 years, Group A has been overpaying payroll taxes, and that's allowed the government to lower income tax rates. The implicit promise of the 1983 deal is that sometime in the next few years, this is going to flip. Group A will begin underpaying payroll taxes, and the rich, who have reaped the benefits of their overpayment for 30 years, will make good on their half of the deal by paying higher income tax rates to make up the difference.

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.

But pay it off they must. The rich have been getting a loan from the middle class for decades, and the loan papers are the Social Security trust fund bonds that George W. Bush is admiring in the photograph above. Anybody who claims the trust fund is a myth is basically saying it's OK for the rich to renege on that loan.

But surely no one would ever say such a thing. Right?