Libertarian-Socialism: American Style -Chapter 2b (Socialism)
Tags: Social Security, Social Change, Politics, Socialism, Libertarian Socialism

Social Security

The balancing of America’s budget has been a political hot potato for a long time, and Social Security is now more than ever a target for that balancing act. Make no mistake about it; Social Security is called Social Security, because it is a socialist program. As the architect of the program, FDR would certainly have seen himself as something of a socialist as well. A close look at the 20th century shows socialism is just as much a part of American success as libertarianism.

Social Security is a socialist program originally championed by a socialist president. However, Social Security as it exists today is not the pay-as-you-go old age pension for retired workers envisioned by Roosevelt. Social Security is no longer FDR’s vision, but represents a conservative reworking of a socialist program too popular to legislate away. Anti-socialist crusaders could not kill outright Social Security outright and instead planted a time bomb to destroy it.

In 1980, Ronald Reagan was elected on promises to cut government overspending. His budget director, David Stockman, was in the spotlight almost immediately. Seemingly, every day, Stockman was under fire for recommending another program be cut. To a political animal like Reagan, it was clear that Americans wanted to pay less for government, but they did not necessarily wish to cut any programs. Reagan learned that Americans wanted something for nothing and it was dutifully delivered.

Reagan and his brain trust made the politically astute decision to fire David Stockman. The American people only wanted lower taxes, not less government. When Reagan actually tried to do what he said he was going to do, most Americans balked at their government program being cut. Much of the limited government rhetoric Reagan had espoused during the campaign ended up unrealized due to political calculus.

Libertarian-Socialists accept that the dead body that lies at America’s doorstep in the form of trillions in debt today is the responsibility of the people as much as the politicians.

A lack of honesty and attention by the citizenry helped create this mountain of debt and that cannot be overemphasized. The libertarian-socialist agenda cannot and will not succeed without an empowered and engaged populace. Engagement means getting the budget numbers and making hard choices. Surely, by now, Americans must understand that one simply does not get something for nothing. The tax cutting folklore that has grown out of the Reagan presidency is illustrative of the lack of attention citizens have paid to the American tax code.

Again, libertarian-socialism is not here to indict the Reagan presidency, but rather to illustrate to the people how not paying attention and not being honest leads to poor governance. Reagan hired none other than Alan Greenspan, before he became head of the Federal Reserve, to heavily rework the Social Security program. Reagan and the Congressional Democrats made a deal to “save” Social Security. This huge rework of Social Security is directly responsible today’s debt.

Reagan’s cutting of the tax rates in the United States has entered into American mythology. To the unobservant, it appeared that Reagan’s budget and tax code rework was a tax break. Historically this tax break has been trumpeted as massive. However, when one looks more closely at what the Reagan administration did in the 1980s, the tax break is far less impressive.

Normal income tax brackets were standardized and overall income taxes were lower, that is true. Largely unreported was that Social Security taxes were expanded to affect more Americans. This is actually a shifting of tax burdens to the lower income brackets, because Social Security is only applied to up to a certain income level. Most Americans never see their income exceed the amount that is subject to the tax, while the rich and well not only enjoyed an income tax cut, but also continued to enjoy a portion of their incomes exempt from Social Security tax. By expanding the number of workers subject to the tax, increasing the retirement age and instituting a tax on Social Security benefits tax revenues increased.

The tax changes specifically brought in more revenues on the backs of workers who have been paying ever since. The revenue increase was not due to the Laffer Curve. The Laffer Curve stated that cutting taxes increases economic activity and there by increases revenues in the form of increased tax revenues due to the increased economic activity. The 1980s are often pointed to as proof of this economic principle, but the increase in tax revenue under Reagan was due to a straightforward increase in taxes on closer inspection, since none of the Social Security’s extra revenue was actually protected from use in the general fund.

The stealthy shifting of the tax burden into a trust fund to pay for future benefits allowed the government to have a much greater day-to-day cash inflow. The excess tax revenues could now be spent by looting the Social Security Trust Fund and replacing dollars with IOUs. Reagan’s alleged tax cuts actually confirmed Keynesian economic ideas. All throughout the 1980s, the government ran huge deficits unless the new Social Security revenues were used and even then, there were deficits. There were huge increases in defense department spending with no cuts elsewhere to pay for these increases in revenue outflow. The greater government spending led to an economic boom in the eighties just as the great socialist economist John Maynard Keynes predicts.

The details of this rework are a bit wonky, but an engaged citizen needs to understand what happened to the tax code in the eighties. Social Security had been a “pay as you go” program, but under the Greenspan rework of the tax code, Social Security began collecting more taxes than it needed to meet its obligations. The standard income taxes did go down under Reagan. There is no doubt of this fact. However, this served as a massive tax cut for the rich and a pittance for the middle class and poor due to the large increase in Social Security taxes. To understand how the Reagan era tax cuts heavily favored the rich and well off, look at the numbers.

The Greenspan plan has been devastatingly effective in shifting the burden of taxation onto working people. The numbers are damning. An American citizen will need to put some brain cells online to understand the numbers. The need for real engagement becomes doubly so when there are complexities to an issue. Such complexities might require some number crunching. Such engagement does require work, but freedom is not free.

Under Reagan’s tax reform, in the case of a family of four, with an income of, say, $80,000, the difference in taxes paid by one family of four versus another family of four can differ hugely depending upon economic class. It is shocking as the difference can be by as much as a factor of ten, sometimes even more. The huge difference is based upon how a family earns their money. If the family happens to be part of a larger, wealthier family, such that their income is from family investments or one of the members is a trust fund baby, and there is income from a modest trust fund generating, say $80,000 annually, the tax burden is shockingly small. The family’s income is inherited investment dividends and long-term capital gains, so they would pay less than $1,000 in taxes on that $80,000 of income.

On the other hand, the federal tax bill for a working family with the same income and not enough deductions to open any other tax schedules to gain access to further write-offs would be over $12,000. Half of which would be going to the Social Security tax. An additional $6,000 would be paid by their employers to yield a stunning $18,000.00 in revenues for the central government from the working family versus a mere $1,000.00 from the trust fund family! The trust fund family uses the roads, and their children attend the schools, yet they pay less than ten percent in taxes of the working family.

The above calculations are all for a tax code that is over thirty years old. This tax system has clearly benefited the very wealthy far more than it does average Americans. After thirty years, Americans see enormous income and wealth inequality compared to the situation before the Reagan/O’Neill tax deal. The recent tax reform is even more lopsided in favor of the wealthy and will likely not last thirty years, because income disparities will become so great that American society will breakdown.

It can take upwards of $200,000 of income in the two wage earner family before their income is no longer subject to the 6% Social Security tax, but the super wealthy and their trust fund offspring are largely exempt. This is the true legacy of the Reagan/O’Neill tax reform. A disproportionate amount of the tax burden was shifted to the wage earners with the promise that the extra tax dollars being collected would be saved in a Social Security Trust Fund. Americans are just starting to learn about the state of the Social Security Trust Fund.

Libertarian-Socialists recognize that Social Security tax dollars are owed to the people, and mostly to those who paid into it, the working class people. Libertarian-Socialists also recognize that the Speaker of the House during the Reagan years, Tip O’Neill, a Democrat, was instrumental in getting these changes through the legislature. The Reagan/O’Neill Social Security reform could have set Social Security to pay for itself despite the wealth inequality that it created had the trust fund been properly managed. Americans are now hearing that the fund will go bankrupt. America’s elected leaders have been removing the money from the Social Security Trust Fund for many years now. That money has been allegedly invested in special government bonds. Nonetheless, the Social Security Trust Fund is actually empty having been spent on the Bush/Cheney upper income tax cuts, Afghanistan, Iraq and numerous military engagements all across the globe. There is now a big fat IOU sitting in that account in the form of government bonds.

The people hold an IOU for trillions that the American government is beginning to seem a little wobbly about paying back. This is the true reason that Standard and Poor’s corporation and the Chinese rating agencies downgraded American debt from AAA to AA+ in 2011. The American government has already begun to default on some of its very real debt obligations in the eyes of those looking in from the outside, like the Chinese and Europeans. To objective observers, shifting the goalposts on the Social Security debt by changing the rules, is cheating to avoid default. Other holders of American debt are rightly concerned about the earnestness of the American government.

There continues to be a huge revenue stream from Social Security taxes, even if that does not currently cover 100 percent of outgoing expenses. Bill Clinton’s budget surpluses were based upon the enormous surplus that the Social Security system was running under at that moment. Now in the 21st century, America needs the Clinton surpluses, but there is only debt. Libertarian-Socialists understand the American citizen has paid for a secure, supportive social safety net. Libertarian-Socialists also understand that it will cost money — trillions, in fact, to pull it off. Restoring American greatness will require an investment in the people and libertarian-socialists see no reason to be stingy in investing here.

Americans want these entitlement programs to go on despite the financial obstacles. Americans want a social safety net. Working Americans are owed these dollars. Americans want unemployment and disability insurance, along with Social Security and Medicare. Despite these wants and desires, America’s social programs need to be restructured, and built-in cost of living adjustments need to be recalculated, if America is to create anything sustainable. A simple rule change to remove the cap on when income is subject to the Social Security tax would go a long way to balancing revenues with outflows. Since the Social Security Tax is only on the first $100, 000.00 any income above that is tax free as far as Social Security is concerned. Of course, most Americans never see this enormous tax break and see no reason that so much income should be exempt, but it is widely opposed by moneyed power. Add some small tax on dividend income to also go to the social safety net and something sustainable begins to appear.

To salvage Social Security as a pillar of an American social safety net, it needs to return to a “pay as you go” program. America’s greatness is locked up in her people. Unless the nation invests in people, there can be no positive future for the American republic.