Wednesday, January 26, 2005

Why do Democrats love Social Security? If the current program, exactly as it now exists, had been proposed by Bush or Reagan they would have hated it. It violates two core complaints that they have made about Bush and Reagan policies:

1) It is a regressive tax. The tax is only applied against the first $88,000 that you earn. If you make $100,000 then the last $12,000 is untaxed. That means that you only paid 5.4% tax instead of 6.2% on your total income. If you earn $880,000 then your Social Security taxes are only .62% of you income. Since when are Democrats in favor of taxing the rich at a lower rate?

2) It pays more benefits to the rich than the poor. Your benefits are based on your highest earnings. Social Security keeps you in the same general bracket when you retire that you were in when you worked.

How is this system any different that the "tax cuts for the rich" that the Democrats have been complaining about for the last four years? What's really going on? The answer is the deep dark secret of Social Security - the Social Security Trust Fund.

When I was a child I asked an adult what Social Security was? She told me that the government takes some of the money that you earn, invests it, and pays it back with interest when you retire. Many people believe that this is how the system works. They are wrong.

What really happens is that Social Security brings in a surplus. This surplus is "invested" by buying US bonds. The government lends the money to itself at interest. The money is then transferred to the general fund and spent. If the government ever needs to "dip into the trust fund" then the money will have to come from the general fund. This will be doubly painful since it will represent a reversal of the current cashflow.

Let me repeat that - in order to use the "trust fund", general fund money will have to be used to redeem the bonds (or the government could issue more bonds, essentially borrowing money in order to pay off loans, a practice that is illegal for individuals).

We could reduce the current Social Security tax to the level needed to cover current payments and it would not make the slightest difference to Social Security's viability. Eventually the general fund would have to cover the difference between income and outlays.

I should mention that the reason that the surplus will not last is demographics. Between Baby Boomers retiring and people living decades longer, eventually the demands in the system are growing.

In the meantime, though, we have a nice surplus padding the general fund. Bush proposes letting people invest some of their taxes, just like it was originally promised the government would do. This will divert money from the surplus and therefore from the general fund. This will require spending cuts.

That is what this is all about. Democrats are not worried about future retirement benefits, they worry about current spending. They don't want to lose that money.

Pay close attention to any alternative plans that the Democrats float. Raising the Social Security rate right now will accomplish nothing since the surplus goes down a rat hole. The only alternatives are to reduce benefits, either through actual cuts or by raising the retirement age, or to let in a flood of new legal immigrants to bolster the workforce.

Cutting Social Security benefits is political suicide and Democrats are against immigrants. My guess is that they will continue to insist that everything is fine just as it stands and plan to retire before the system has problems.

BTW, did you know that Congressmen have their own pension system?

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