Michael Lind weighs in again on Social Security

The other day I ran through some of the claims made by the New America Foundation's Michael Lind and, well, found them a bit wanting. (Sorry about the "lefty claptrap" line…) Since then, Lind has again written on Social Security and his arguments are typical enough of those you hear from the left that they're worth revisiting.

To start, Lind says:

Last Tuesday, just before the release of the annual Social Security trustees report, I predicted that no matter what the report contained the perennial enemies of America's most effective and efficient universal social insurance program would cite it as proof that Social Security needs to be means-tested, privatized or both. The report is in, and its contents are far from dramatic. The (dubiously) estimated date at which, absent changes, the trust fund dries up and Social Security shifts to a pay-as-you-go program paying most, but not all, promised benefits has moved up slightly from 2041 to 2037.

In the 2008 Report, Social Security's long-term deficit was 1.7 percent of payroll; in the 2009 Report, it's risen to 2.0 percent of payroll. By my math, that's an 18 percent increase. One would think that a nearly one-fifth rise in the deficit would be at least worth mentioning.

Next, Lind says:

The "unfunded liabilities" argument is … only applied to programs that, like Social Security and Medicare, are paid for by a dedicated tax like a payroll tax. The projected gap between future revenues and future outlays from this special-purpose tax is the "unfunded liability." Why do we never hear of the "unfunded liabilities" of Pentagon spending -- the third of the big three spending programs (Social Security, Medicare, defense) that take up most of the federal budget? Defense spending comes out of general revenues, not a dedicated tax.

A couple points: one reason Social Security has a dedicated tax was to wall it off from the rest of the budget. So long as it's adequately funded, Roosevelt reasoned, it would be very hard to cut the program's benefits. Fine. But the same holds true on the negative end: if the program is supposed to be self-financing, then any shortfalls are reported. I'm not sure what the problem is with that, unless Lind disagrees with how Roosevelt established the program. Second, defense spending is largely done on a year-to-year basis; at most, the government pays for a ship today that it won't receive for several years. Social Security, by contract, taxes you from the day you begin working and upon those taxes incurs an obligation to pay you benefits until you die. The 75-year reporting horizon was chosen for exactly that reason: to span the typical life of an individual entering a program, to let him know the sufficiency of the program's funding to the approximate maximum age he might live. (I can probably find this explicitly stated somewhere in the Trustees Report if needed.)

Next, Lind tackles the trust fund debate:

Cato's [Michael] Tanner does concede that the Social Security Trust Fund will pay benefits until 2037. He claims, however, that "that figure is misleading, because the Trust Fund contains no actual assets. Instead, it contains government bonds that are simply IOUs, a measure of how much the government owes the system." So government bonds backed by the full faith and credit of the U.S. government, a government that has never defaulted on its obligations in its entire existence since 1776, are not actual assets?

Imagine you're a taxpayer and you're offered two possible options: first, the trust fund is filled with U.S. Treasury bonds. When Social Security starts running deficits in 2016 it redeems those bonds and to finance the redemption the government raises your taxes, cuts other programs or increases the deficit. What this points to is that the trust fund, while an asset to Social Security, is an equal and opposite liability to the Treasury – and to you, the taxpayer. Now imagine instead that the Trust Fund held, say, Canadian government bonds. Come 2016, it's our friends up north who have to raise taxes, cut spending or run a deficit. This is the point people on the center and right make about the trust fund: not whether it will be paid back, but how. The trust fund is an asset to Social Security, but it's not an asset to taxpayers.

Next, Lind moves to reform options:

[E]ven when the trust fund runs out and Social Security becomes a pure pay-as-you-go system… lifting the cap on the amount of income subject to the payroll tax would eliminate that problem forever. In other words, the contract between elderly Americans and the rest can be honored in half a century by slightly higher taxes that would fall chiefly on much richer Americans in a much richer America."

Unfortunately, this really isn't the case. Even if we eliminated the payroll tax ceiling in 2037 – something that would radically change the nature of Social Security as originally designed – and if we didn't pay any additional benefits in exchange for the extra taxes – another blow at Social Security's founding ethos – the program wouldn't even be solvent in 2037, much less forever. That is to say, Lind's proposed tax increase, which would raise the top marginal tax rate by 12.4 percentage points, by the by – wouldn't even cover the deficit in that year.