Off the Budget Table

By Malcolm Mitchell

    With a federal budget deal apparently at hand, the facts of Social Security financing need to be re-emphasized. Last April, when President Obama, in a gesture of compromise to Republicans, proposed cuts to Social Security benefits to help reduce budget deficits, liberal Democrats were outraged. At the time, Republicans simply ignored the federal budget, preferring to create havoc over raising the nation’s debt limit. Eight months later, behind-the-scenes negotiations to come up with one are taking place, with Social Security cuts still on the table.

    What is most peculiar is that no one in either party has challenged the president’s assumption that cutting Social Security benefits will reduce government spending. The reality, as most Americans know, is that Social Security is self-supporting and has nothing whatever to do with the federal budget. It is the nation’s collective 401(k). Every employee contributes 6.2 percent of his or her salary into a trust fund, and those amounts are matched equally by employers. Retirement benefits are paid from that fund to American workers who have contributed during their working years, and to their survivors.

    The Social Security Administration manages the fund, investing its balances in Treasury bonds. All the money in the fund today — nearly $3 trillion, or more than three years’ worth of benefit payments — came from, and belongs to, American working people; none came from the government’s “general revenues” (except for the interest the government pays on its bonds, regardless of who owns them). Most Americans understand all this. Comments like “Social Security does not cost the government a dime” appear regularly in the web postings of ordinary citizens.

    So how did the false idea that the government “spends” money on Social Security spread? The answer is that ever since the Social Security Act was passed in 1935, most politicians and public policy experts have argued that only the federal government can guarantee retirement benefits. All the European retirement systems that Franklin D. Roosevelt’s advisers studied as models, beginning with Bismarck’s German system in 1889, relied on government money to bolster workers’ contributions when, as was expected, those contributions were insufficient to pay promised benefits. F.D.R.’s cabinet and his advisers believed that the U.S. system would follow the same pattern.

    Not F.D.R. He insisted that every dollar would come from the contributions of working Americans and their employers; America’s retirement system would carry no hint of “the dole.” Payroll contributions, he said, give the contributors “a legal, moral, and political right to collect their pensions.” If the system runs low on money, the contribution rates would have to be raised. By removing the government from responsibility for funding benefits, F.D.R. argued, “no damn politician can ever scrap my Social Security program.”

    As in most New Deal programs, F.D.R. had his way. The 1935 Social Security Act contained no provision for government financing of retirement benefits. Most of Washington criticized the omission, and the political urge to change the law remained strong. In May 1977, when President Jimmy Carter asked Congress to raise the rates for Social Security contributions (the trust fund had run down to barely three months’ worth of benefit payments), he also asked for new legislation to allow the federal government “to compensate the Social Security trust funds from general revenues.”

    Support for Carter’s request came from 70-year-old Tom Eliot, who as a young lawyer from Harvard had played the major role in drafting the original Social Security bill. Permitting the government to supplement payroll contributions from general revenues, Eliot wrote, would “get rid of the notion that the system should be forever ‘self-supporting.’ ” The payroll contribution, he continued, “while necessary to effectuate the contributory principle, is a regressive tax and should be held at a very low rate.”

    However, neither Carter nor Eliot reckoned with the enormous popularity of Social Security among the American people, based on the very ideals that F.D.R. defended. Although Carter got all the changes in contribution rates he had asked for (the rate rose in increments from 4.95 percent to 5.4 percent by 1982), Congress did not allow the federal government to shift other federal funds into the system. Jim Guy Tucker, a young representative from Arkansas at the time, exemplified Congress’s opposition. “My father,” Tucker said, “was manager of the Social Security system in Arkansas, and I grew up with a respect and understanding of Social Security and its importance for the working people of this country.”

    Social Security remains to this day self-funded. The contribution rate was raised to 6.2 percent in 1990, in anticipation of baby boomers’ retirements, and it has not been changed since. With the trust fund surplus now covering over three years of payouts, the system’s actuaries expect clear sailing for at least 15 years. If any problems arise after that, they can be dealt with, as in the past, by slight increases in the contribution rate or, more likely, increases in the salary cap (now $113,700) on which the rate is collected.

    Social Security has no role to play in efforts to reduce government spending and no place in debates over how to reduce government deficits. The challenge for American working people, now and in the future, is to remind Washington of that fact.

    Malcolm Mitchell, who lives in New York City and East Hampton, is editor and publisher of Investment Policy magazine. His e-book, “Up From Gold,” was recently published on Amazon.