On the very last working day of 1989, Senator Moynihan (Democrat, N.Y.) deposited a little surprise in the legislative hopper: a proposal to cut the Social Security tax. Then he took off on a mission to Africa, where he was out of touch with reporters for almost three weeks. Meanwhile, his colleagues in the political world, along with much of the press, reacted to his proposal much as they would react to a letter bomb. "Seductive Tax Cut; Dangerous, Too" declared the New York Times. [2]
By the time anyone could contact the senator, it was widely supposed that his proposal was just a political ploy. That was the only light in which it made sense to the liberal wing of his party; in 1990, no one could imagine that a Democrat might truly wish to cut taxes. Mounting budget deficits in recent years had already exerted a steady, downward pressure on the social programs that were dear to Democratic hearts. On the other hand, Moynihan’s proposal pulled the rug out from under the Bush administration, which was pushing for a cut in the capital gains tax. A cut is a cut; why not cut the tax which bore most heavily upon working stiffs? It was fun to watch the president squirm, as he tried to explain that his tax cut would stimulate investment, while Moynihan’s would threaten the future of Social Security.
When Moynihan was finally contacted, however, he made it clear that he meant the proposal seriously. There was a history behind his attitude. In 1983, he had participated in a Presidential commission which established a schedule of rising payroll taxes for Social Security. In retrospect, he felt he had been used. The argument had been that, by levying more than was needed for immediate payout to existing retirees, the system could build up a fund which would be invested in productive ventures. This would promote economic growth, making it easier for future generations to support the retirement of those who had paid the tax. (See? The commission was thinking in the very terms we’re discussing. It isn’t as if nobody ever thought of this before.) Once the Social Security tax was increased, however, the Republican administration simply applied it to whatever expenses the government had in mind, meanwhile using the revenue to make its budget deficits look smaller, and taking bows for having cut the income tax. In other words (as Moynihan saw it), the GOP’s vaunted tax cuts were merely a shift from progressive taxes to regressive ones.
Moynihan concluded that, since the proceeds were not being used as intended, the only reasonable thing to do was to cut the Social Security tax and return the system to a "pay as you go" basis. [3] (One could argue that a more reasonable "only reasonable thing to do" would be to start using the proceeds as intended, but for some reason, Moynihan never suggested that. Perhaps he worried that, in the political context of the time, the funds would only be shifted away from social programs, whereas he had envisioned economy-building as an additional government activity.)
In the end, Congress rejected Moynihan’s proposal, and the debate was dominated by its "politics of envy" aspects. It did, however, for a while play a spotlight upon some defects of the Social Security system, and of governmental accounting in general. Various parties to the debate said things that would have been educational, if they hadn’t been coupled with other things said by the same parties.
To begin with, the debate publicized the fact that Social Security was not a saving scheme, and never had been. In criticizing the misapplication of the funds brought in by the 1983 reforms, Moynihan called everyone’s attention to a surprising fact: before those reforms, the Social Security system was never even intended to generate benefits by building up the economy. It was called a "pay as you go" system: current benefits were to be paid out of current Social Security tax receipts. [4]
"Pay as you go" sounds prudent and responsible -- even stuffily conservative. In our minds, we automatically counterpose it to "fly now, pay later" and other schemes which appeal to the improvident side of our nature. As applied to Social Security, however, it’s misleading. In the nature of the case, we can't pay for our Social Security as we go. We pay as someone else goes. We, while we’re young, pay in, and current seniors take their well-earned rest. Our payments are logged to our credit, and we trust that a later generation, honoring the credits, will pay as we go.
This was bound to be an insecure system. A private insurance company which operated in this manner, paying current annuities out of other people’s current premiums, would be subject to criminal penalties. A seller of annuities is supposed to build up a fund of savings, invested in safe, income-bearing assets, with time enough to accrue what the annuitants have been promised. Then it may start to pay out. Social Security did nothing of the sort. From the very beginning, it started paying out benefits, without waiting for paid-in funds to achieve anything in the way of increased production. It simply depended on subsequent taxpayers to redeem the promises which were being made to current ones. In effect, it looked upon future tax revenues as a dependable, already assured income source, not having to be grown in any way to warrant its being preempted for this use.
The obvious question is, "What happens to such a system if the population takes a downturn, or if average income falls, or if people live longer?" If population shrinks (at the youthful end first), fewer workers will have to foot the same bill. If average income falls, the same bill will be harder to bear. If people live longer but retire just as soon, the younger generation will have to pay longer as the older generation keeps going, and going, and going.
Alan Greenspan, head of the 1983 Presidential commission in which Moynihan participated, at least attempted to move Social Security toward a true savings system. Unfortunately, while boosting the Social Security tax, the "reform" did nothing to constrain the way the added revenues were spent. Whether this was an oversight on the part of the commission, or simply the way things worked out in the push and shove of politics, it killed the whole reform. "Pay as you go" was merely supplemented by "spend as you pay". The "Social Security trust fund" became a mere bookkeeping entry -- a vague promise from us to us.
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