Letter 2 America for December 14, 2012

Dear America,

The Gramm-Rudman-Hollings Act of 1985 temporarily returned Social Security to "off budget" status in 1985 after two decades or so of inclusion of Social Security in the federal budget process, and off budget status was made permanent in 1990 by another budget act aimed at getting our fiscal house in order.  The Congressional Budget Office was created by congress in the 1970's and has rules that are changed periodically in accordance with which it makes certain assumptions in order to calculate the effects of the multitude of scenarios in which congress is interested at any point in time.  For some reason, Gramm-Rudman-Hollings and the CBO's assumptions are not consistent on one key point: the off budget status of Social Security.

While that sounds like it has only a technical significance, it isn't so because in prior years--up to about two years ago--the contributions to the surplus in the Social Security Trust Funds that we were making every payday were included in the amount of the federal government's gross revenue by CBO, thus making revenue look that much more favorable.  Concomitantly, spending from The Trust Fund was included in federal expenditures by the CBO, and the deficit was exacerbated by that amount.  Thus, when Social Security went from bringing in a surplus, which the government borrowed, to running a deficit every month when revenues were compared to outlays, conservatives had a new tool to use against the program.  They began to claim that Social Security was costing too much because the federal government had to borrow every month to fund it.  But that isn't exactly so.  The Federal government does have to borrow money every month, but not because of Social Security's account balance.  There's a $2 trillion credit balance in Social Security's account at the U.S. Treasury where the bonds issued to The Fund in lieu of cash are held.  But now, the federal government does have to borrow from someone else every month to pay up on the bonds that are maturing because the amount that it can borrow from Social Security every month is now zero.  Since more money goes out of The Fund than comes in, that source of rolling credit no longer exists and the obligation to repay past loans from The Trust can no longer be covered by new loans from The Trust.  No more credit card for the federal government; just more naked debt.

The significance of the assumptions the CBO uses when "scoring" a proposed spending measure is that everyone quotes it if he likes it.  Thus, as Social Security is not off budget for purposes of CBO reports to congress, discussions of the deficit and the national debt always include Social Security now when they should not because Social Security pays for itself out of funds that have been saved over the past twenty five years or so...funds that won't run out until at least 2032, and as late as 2042 by a recent estimate from the office of the Social Security Fund Trustee, Tim Geithner.  So you can see how the information on which congress bases its evaluation of everything it does is skewed for the purposes of making "entitlements" the villain of every piece.  But there is also constant uncertainty about where we really stand because of this untoward CBO accounting practice that warps reality and in effect, deceives the American people.

For example, when we discuss the effect of eliminating the Bush tax cuts for the rich, the numbers are off by that Social Security vigorish that congress has built into every calculation made by the CBO.  No wonder we can't resolve the issue of whether do do so to anyone's satisfaction.  I have seen numbers as low as $42 billion and as high as $82 billion for the effect of those tax cuts one way or the other.  And then there's the calculation of the national debt and deficit.  By including Social Security in every baseline assumption, the effect of changing the COLA calculation from the straight consumer price index (CPI) to the chained CPI is just the opposite on calculations of the deficit--the negative balance between revenue and expenditures on a yearly budget--of what it is for the debt, which is the total amount that our country owes everyone it has borrowed from and not yet paid back.  So, decreases in federal benefits--on Social Security specifically for these purposes--by basing COLA's not on the CPI but on the lower, chained CPI as proposed by conservatives have a positive effect on the deficit because they reduce the federal government's monthly outlay to cover what it owes to our Trust Fund, whereas the effect on the fund in the long term of such benefit reductions is only to defer payment of the debt that the federal government already owes it.  I repeat: the effect on the national debt, including the $2 trillion lent by the Social Security Trust fund to the U.S. government, is to defer repayment of what the government owes The Fund.  The implicit Republican claim is that such a change would reduce the debt, but those bonds in The Fund have to be paid eventually.  So, no matter what congress says about it now, our debt may seem to be reduced when Social Security benefits are cut, but it isn't. We, the beneficiaries of Social Security, have to suffer for a cosmetic bookkeeping maneuver that conservative Republicans want to claim credit for in the way of deficit reduction when in reality, they just want to "kick the can down the road" on the national debt while they castigate everyone else for doing so.  And as a bonus, they advance their plan to kill Social Security softly...one slice at a time without really accomplishing anything.

But this chained CPI change doesn't affect just Social Security recipients.  It also effects higher tax rates on the working poor and lower middle class earners because Republicans want to apply it to all government programs, including the indexing of income tax rates.  Of course, that significantly affects only people earning below $250,000 because the cumulative effect over, say, ten years is about two percent of your tax burden if you earn $50,000, but as you get farther above that level, it means less and less as a percentage, meaning that the rich bear the lowest burden proportionally and the working poor bear the largest.  So on the pretext of reigning in Social Security's impact on the national debt and deficit, the Republicans can veil their intentions on every CBO report with regard to everything else, including taxes, because they have managed to make rules that bring Social Security into consideration for debt and deficit calculation when it shouldn't be.  It's complicated, deceitful, and as seems typical of Republican policy of late, very near nefarious.  Every one thinks Social Security recipients, like me, are the only ones being had, so interest in things like the chained CPI substitution get overlooked by the vast majority of Americans.  But beware America.  It's not safe for any of us in Romney's 47% to pick up the soap.  Still, if chained CPI is the sacrifice we in the lower economic strata have to make, CBO's inclusion of Social Security in the discussion of debt and deficit reduction is immaterial so long as the top tax rates, those on the top two percent, go up in order to equalize the effects of higher taxes and lower benefits on the rest of us.  I say give this to get that...but only to get that, regardless of any CBO Report.

Your friend,

Mike