And Will It Still Be Around For The Next Generation?
By Melvin J. Howard
If you look at your pay-stub you will see
two deductions for FICA taxes. Ever wondered what it means? Well FICA stands
for Federal Insurance Contributions Act and covers two basic benefits for
retirees and disabled persons:
Social Security:
Labeled as FICA-OASDI or
Old Age and Survivors Insurance and Disability Insurance. This provides pension
benefits to retirees, survivors and disabled persons.
Medicare:
Labeled as FICA-HI or
Health Insurance. This provides medical insurance for retirees, survivors and
disabled persons.
Some of you may be aware
that the amount of money the government collects from employees and employers
as the FICA taxes has exceeded the government's obligations in Social Security
and Medicare payments for the past three decades. This has been true since FICA
taxes were increased under the Reagan administration in 1983, at a time when
other Federal Income Taxes were reduced. Then the question is "What has
the government done with that excess money?" It’s all been spent on other
things. About $2.2 Trillion of Social Security and Medicare Surpluses - all
spent elsewhere by the US Treasury. Let’s see why this is. Many people are
upset because they think the government should have "saved the money"
for the future and often they are misled to believe this through the existence
of what are called the Social Security and Medicare Trusts, or sometimes known
as the Lock Boxes. In what form could the government save the money?
Perhaps:
* Keep it as US dollars
or deposit it in a bank,
* Invest in the private
sector, or
* Buy government bonds.
I.e. write IOUs to oneself.
Let's look at the first
possibility. If the government keeps the money as US dollars this is tantamount
to the Treasury intervening in monetary policy, which is the job of the Federal
Reserve. The Treasury would be essentially holding large sums of money out of
the economy for many years, which would not make sense at all. The Treasury
could instead decide to deposit the savings in a bank thereby making the funds
available for use in the economy and draw on its deposits later as benefits
fall due. But the banking system is backed up by the government itself, so the
promises of the bank to make good on depositor’s funds is ultimately the
promise of the government to itself. So why bother with all the banking fees?
It makes more sense for
the government just to write a note to itself - "I owe to myself $x
trillions of dollars", which is essentially what happens. A similar
argument applies to investing the funds in the non-government guaranteed
private sector. The private sector depends for its success on the stability and
financial security of the State. If the State collapses so does the private
enterprise defined by the rules of the State. If certain private enterprises
collapse it shouldn't affect the State, except if there is massive widespread
collapse like the recent banking crisis and then the State would step in to
provide as many guarantees as possible. So some ultimate risks are still born
by the State. The main point is that investing in the private sector carries
with it higher risks than holding a government obligation. And the main point
of Social Security is to pass risk from those that can least bear it over to
those that can. Private investing without government guarantees completely
removes this risk transfer feature of Social Security and places private sector
investment risks onto those who can least afford it.
Therefore, as
nonsensical as it sounds, so long as there is a surplus collection, the most
sensible thing to do is for the Social Security and Medicare funds to pass over
the excess funds they collect each year to the Treasury for it to spend back
into the economy. The Treasury then writes an IOU to the trust fund to pay back
the amount it just spent on something else. Basically the Government is writing
an IOU to itself. Then they put the IOU in a box, lock it up and call it a safe
"lock box" or trust fund. Whether intentional or not, what
effectively happened to the Social Security and Medicare surpluses generated by
the Reagan Era FICA tax increases and reductions in benefits, helped fund
Reagan's big military build-up of the eighties. With a Federal Income Tax Cut,
but an increase in FICA taxes, the tax burden was less progressive, and the
loss in tax revenues in the general Treasury account was somewhat offset by
Social Security Surpluses. This shifting of funds also enabled the government
to replace borrowing from the private sector (the markets), which it cannot
default on without dire consequences to the economy, with a promise to "pay
back" the funds to Social Security and Medicare many years in the future
when needed. This is a much less serious promise than issuing debt to the
private sector because future governments may very well get away with reducing
publicly funded social security benefits if they argue it effectively enough.
However the government
cannot default on debt issued to the private sector else it will send the
markets into a tailspin (since it is the most risk-free asset) and thus send
the world's economy crashing. The Bush tax cuts and the recent extension of
those cuts has compounded this trend of borrowing from Social Security and
Medicare to make up for lower general revenues and thereby fund other
government expenditures, and substitute borrowing from the markets with
borrowing from Social Security/Medicare. Only time will tell if this was the
right move or will promises be broken.
