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Social Security Isn’t a Pension Plan But

11:58 am in Social Security by masaccio

From Shanghai, Photo by Sean Munson via Flickr,

The most obvious way Social Security is like a pension plan is that the rich are trying to destroy it, just like Hostess Brands wrecked the retirement plans of its bakers. But there are other similarities. Since 1983, we have all paid in a lot more money in FICA taxes than needed to fund current payments on the theory that it would be there for baby boomers when it was needed.

Pension plans do the same thing. They use actuarial calculations to figure out how much money they need in out years, and how much they need to take in today to make those payments. Then they invest the money as safely as possible so that it will be there when it is needed. The Social Security Trust Fund was ordered to use the excess contributions to buy Treasury obligations, albeit of a type supposedly not to be sold to the public. Those obligations are the bulwark of the demands of citizens who don’t want to see any more cuts to Social Security. They also constitute a partial explanation for the desire of the rich to cut Social Security: the bonds will have to be redeemed, meaning either the Treasury will have to sell bonds to replace them or we will have to increase taxes to fund the repayment of the bonds, or some other step will be necessary that the rich don’t like.

The deep desire not to pay the bonds is part of a longer term project, tax reduction for the rich. In fact, the use of the Special Treasury Obligation/Trust Fund was meant to disguise the reality of the huge tax cuts handed to the wealthy in the 1980s in a lovely bipartisan way. The unfairness and stupidity of the tax cut for the rich was hidden by the increase in the FICA taxes imposed only on income from work, and only modestly affecting the income of the rich. Meanwhile, the rich funded the increasing Reagan deficits by lending money to the Treasury that should have been paid in taxes.

Congress adopted a unified budget approach that folded the increased FICA taxes into the revenue side, making budget deficits seem much smaller than they actually were. (That was theoretically changed in 1990; see this for details of the current situation.) Now that it’s time to pay off the bonds held by the Trust Fund, the richest Americans have made their position clear: they aren’t paying back those bonds, and they won’t pay more taxes. They get support from their servant think tanks, like this from Jagadeesh Gokhale at the Koch Cato Institute:

Let us recognize that past excess payroll taxes relative to benefit outlays (past Trust Fund surpluses under the “off budget” perspective) have been spent on other government programs. Grants of additional spending authority for Social Security must ultimately be paid out of today’s and future taxpayer resources so making them whole is not really possible.

Gokhale says that the bonds held by the Trust Fund are like corporate borrowings, where the proceeds are used for corporate purposes. When due, they are either are paid from future income and assets, or are dumped in the trash through bankruptcy or negotiations with creditors. Let’s default, he says. He might want to check out the Fourteenth Amendment.

But the richest Americans plan to act on Gokhale’s advice. They are going to cut the retirement benefits of millions of fellow citizens rather than pay more taxes. And they have their hired hands in government to make that stick. Here’s their pet Senator, Mitch McConnell:

Predictably, the President is already claiming that his tax hike on the “rich” isn’t enough. I have news for him: the moment that he and virtually every elected Democrat in Washington signed off on the terms of the current arrangement, it was the last word on taxes. That debate is over. Now the conversation turns to cutting spending on the government programs that are the real source of the nation’s fiscal imbalance.

Where does that leave people dependent on Social Security, Medicare and Medicaid? The Center for Retirement Research at Boston College recently issued an update on its retirement risk index. Here is the conclusion:

The NRRI shows that, as of 2010, more than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 – which is above the current average retirement age – and annuitize all of their financial assets, including the receipts from a reverse mortgage on their homes.

President Obama sees himself as a moderate Republican. He thinks that if half of the families in the country can’t maintain their standard of living in retirement, they should simply substitute a less pleasant life. They could, for example, live on a moderate amount of catfood, which is the logical substitute for tuna fish under his Chained CPI proposal. The Republicans in the House and Senate have a counteroffer: the old should die in the street. I’m sure there is a compromise for this infinitely flexible President: maybe we can set up Federal Die-In Locations so the rich won’t have to see the dead.

The Central Question Posed by the Great Crash

11:53 am in Economy, Financial Crisis by masaccio

The Great Crash posed one question for this country: who would bear the losses? Would it be the banks that caused the problems? The officers, directors and shareholders of those banks? Their careless counterparties? The investors who bought the fraudulent real estate mortgage-backed securities and the complex spin-offs? The owners of capital who threw money into hedge funds and other exotic investments expecting a geyser of money in return?

No. That group doesn’t lose money. They used their control over the government and the Fed to make sure that the losses would be passed on to the rest of us, pushing millions into or near poverty. The savers were trashed by the Fed’s zero interest rate policies. The national debt run up by tax cuts and wars gave the rich an opportunity to end the safety net and focus all of the efforts of government on protecting them and their interests. The rich are safe. The rest of us are in deep trouble.

The government threw money at banks with abandon, leaving incompetent failed executives in place. When it turned out that banks lied about the quality of the notes and mortgages transferred to the RMBS Trusts, the SEC and the Department of Justice refused to investigate, let alone prosecute.

Banks didn’t complete the transfer of those worthless notes and mortgages into the Trusts, so the IRS announced it wouldn’t enforce the requirements for pass-through non-taxable status. The servicing arms of those banks cheated and lied to courts around the nation about ownership, and when they got caught, they talked the government into a sleazy settlement that gives nothing to the people damaged by the frauds and allows the banks to continue to lie and cheat, if at lower levels.

This list could be expanded indefinitely, with the same outcome: the Fed, Congress and the White House have only done those things that protected the money of the rich, whether or not the settlement was consistent with the law or not.

It didn’t have to be this way. From the outset, there were things that could have been done that would have placed the losses where they belonged: on Wall Street and its criminal denizens and its careless clients. The bailouts could have come with constraints and requirements, firings, lawsuits, and indictments. The entire rotten structure could have been pushed into a form that would not threaten the lives and incomes of the middle class, a group whose responsibility for the problems was minimal in contrast to that of crooked lenders and swindlers.

No. Not in this country. Not in a nation ruled by oligarchs and a government in thrall to economic theories years after those theories revealed themselves as nonsense, or to the rich who endow those irrational theories with sanctity of revealed truth, or both. There was never a day when the primary or even subsidiary consideration was the middle class, or the rule of law, or even the pretend values of the free market. The only consideration from the outset was the protection of the rich.

Even two years later, the government showed no interest in raising taxes on the richest Americans. Both parties explained that they couldn’t raise taxes even on the rich in a recession, and that the only solution was cutting out unemployment benefits, lowering the minimum wage, slashing Social Security and Medicare, and removing people from Medicare and the shredded remnants of help for the worst off.

The current lousy economy is a result of deliberately chosen policies. The government could have chosen policies that would have protected the middle class at the expense of rich criminals and their clients and their hedge funds and their off-shore trusts and their tax-avoidance schemes, the people and entities that wrecked the economy. It didn’t.

It’s not that we don’t know what to do to make the economy work for the middle class. We do. The government and the elites and the rich won’t allow it. They go house to house, from Bangor to Bakersfield, saying to the inhabitants, What part of this sentence don’t you understand? You think we’re going to eat our losses? You think we don’t care about our money? Well. Suck. On. This.