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The Social Security Scam: How Media Driven Misdirection Is Being Used to Hijack Your Future

As the budget battle rages in Washington, calls to cutSocial Security benefits are ramping up. Pundits pushing ‘conventional wisdom’ say that doing so is prudent for a nation facing large deficits. This solution is endorsed by congressional majorities, along with virtually every talking head on television (with varying degrees of rhetorical eagerness or caution, depending on party affiliation). The assumption that deficit reduction can be achieved through cuts to Social Security benefits is so ubiquitous that most Americans would be dumbfounded to learn that this assumption is totally false.

As the budget battle rages in Washington, calls to cutSocial Security benefits are ramping up. Pundits pushing ‘conventional wisdom’ say that doing so is prudent for a nation facing large deficits. This solution is endorsed by congressional majorities, along with virtually every talking head on television (with varying degrees of rhetorical eagerness or caution, depending on party affiliation). The assumption that deficit reduction can be achieved through cuts to Social Security benefits is so ubiquitous that most Americans would be dumbfounded to learn that this assumption is totally false.

In terms of our deficits and debt, cutting Social Security benefits is exactly like raising the limit on one of our credit cards. You can transfer other balances using the Social Security surpluses, or buy new stuff, but it won’t change total debt. While you’d expect this to be a major issue in the debate, it’s not. It is ignored because debatestarts with the assumption that this “solution” works. Here we can thank our media, which obscures debate rather than illuminating it.

The presentation of views from a limited cross-section of our two political parties (usually conservative Democrats and most Republicans) typically creates the impression of full coverage — “both sides” — while leaving key information and assumptions unexamined. With Social Security, this is done by marketing, as gospel, the idea that there is broad agreement from the left and right about the efficacy of cutting it, best exemplified by the media worship of the “bipartisan” deficit commission. So questions concerning the fairness or feasibility of reducing deficits with cuts to Social Security are moot, and debate can jump straight to political soap-opera mode: “Does Congress have the guts to go after Social Security? Will doing so help raise the political capital of Republicans or Democrats?” The protagonists and antagonists are the parties and their personalities, with the only point of consideration being whether there is sufficient political will “to do what must be done.”

Looked at another way, the media endorses Beltway thinking by self-imposing restrictions on its own power. Where mainstream politicos agree upon a question of fact — like the ability of Social Security cuts to reduce the deficit — the media is powerless to present contradictory evidence. Mainstream journalists seem reluctant to interfere with the political system by conducting their own good-faith fact checking. Doing so might unfairly benefit whichever political flack is telling the fewest lies, or, worse, embarrass both parties. In the news business, that kind of independent journalism is called “bias.”

What would the debate look like if the media started at the beginning, exploring first the merits of cutting Social Security before getting into how the program might be cut?

We would probably first consider what Social Security is: a 75-year-old public insurance program that allows us all to save just enough to avoid working to the grave for food, or moving in with our adult children out of destitution. It works spectacularly well, solving a problem that has always dogged humankind. Social Security grants dignity to hundreds of millions of aging Americans who would otherwise confront the less pleasant world that existed before the program.

That’s not all. Social Security is arguably the most stable, well-run government program in the United States. While other programs, like military spending, require new votes of money every single year, Social Security is running a surplus and will be over a hundred years old before it starts falling short of its obligations. Moreover, it would be solvent for many more years with only minor adjustments. It’s government at its best.

Social Security’s resilience stems partly from the politically savvy way in which it was created. It can’t be dismissed as a simple welfare program because it’s not a direct handout; ultimate benefits are based on your lifetime contributions. Further insulating it from charges of “income redistribution,” Social Security imposes taxes only on income corresponding to those deriving the greatest benefits: The tax is applied to income below $106,800. This is limited government with an American twist — you will be asked to pay in only so much, and what you get in the end is based on what you put in.

A couple of other facts about Social Security’s payouts warrant note. Unlike regular retirement accounts, Social Security distributions to retirees are not the same dollars those retirees paid in; like insurance, current benefits are funded by current contributions and interest derived through loans made to other programs (more on loans below). Related to this, while benefits are tied to individual contributions over a working life, payouts also take into account projections of future standards of living.

To fund the payouts, an independent tax — the payroll or FICA tax — was established (later including taxes for Medicare). This kept retiree benefits separate from the regular pot of money used for discretionary spending, and facilitated Social Security’s regressive tax rate, aimed at the middle class and poor who depend on the program. To get an idea of just how much this tax is tilted towards those who most benefit from the program, consider the following: unlike regular income taxes, a billionaire doesn’t pay a similar percentage, but the same dollar amount into Social Security as someone who earns $106,800. Put another way, a top hedge fund manager pays about 0.003 percent of his income into Social Security, while anyone earning less than $106,800 pays 12.4 percent — a rate over 4,000 times greater than that of the much wealthier hedge fund manager.

How does the structure of Social Security and its tax rates relate to our debate? Let’s look at the most basic description of our current discussion: both parties’ leaders and the media claim that cutting Social Security benefits would reduce the deficit, and that such cuts are probably necessary; there is disagreement only over the size of those cuts, with a few, rarely-interviewed “lefties” arguing against any cuts at all. (Sen. Harry Reid is an exception among mainstream politicians in his arguments for no cuts, and he is being lambasted for it.) In other words, the general consensus among “serious” people is that benefits must be taken away from those paying in, so that we can make up shortfalls in other pots of government money.

But taking into account the way it is taxed, any diversion of Social Security benefits towards balancing the general budget is a tax increase on those earning under $106,800. If the middle and lower classes are the ones who have been paying the highest tax rate into this pool of money, using this pool to offset shortfalls in our general income tax, instead of paying out benefits, would represent a systemic shift in tax liability for general spending. For all practical purposes, it would be a tax on benefits going to the poor and middle class, used to offset recent cuts in income tax for the rich.

Given public outrage over the ever-decreasing tax burden on the rich, you’d expect those suggesting that our debts be settled exclusively by those earning under $106,800 to be run out of town with pitchforks. Yet, amazingly, politicians and the media collaborate with impunity to ignore this shift in taxation. Just ask yourself: how often do those who advocate reducing the deficit with cuts to Social Security argue that the middle and lower classes should bear the burden of our debt? For that matter, how often do hosts on CNN or the Sunday political shows require such advocates to even acknowledge that their plan asks working families to service our debt? In contrast — to drive the point home — when the rich are asked to pay more, do media and politicians completely ignore who is getting stuck with the bill?

In all likelihood, this inequity is ignored precisely because it would spark outrage. If the public was exposed to regular debates about the tax implications of using Social Security benefits for regular spending, it might take that option off the table entirely. Indeed, the best excuse available to politicians and pundits who studiously conceal this tax hike on the common classes — the only possible excuse — would be that deficit reduction is such a critical priority that the public can’t be trusted with knowing the side effects of treatment.

But even this paternalistic excuse is full of holes, in light of another fact: not only would balancing the budget with cuts to Social Security sock working people, it wouldn’t even work.

Social Security’s surpluses have been used towards general expenditures for years, and it’s true that cutting benefits will increase the amount of surplus available. But Social Security is a separate and independent financial entity, which can only loan money to the federal government to fund general budget items. For the purposes of our deficits, Social Security is essentially a credit union constituted by the retirement savings of the American people. By law, the government can’t just spend your retirement savings on something else.

In fact, when our government takes money from Social Security to use on general expenditures, it must, under law, issue Treasury bills to the Social Security Trust Fund in return. This is basically identical to the way in which we borrow money from China. And like China, the only way to renege upon this loan would be to fail to honor the Treasury bills, which would destroy the value of every Treasury bill and with it the dollar itself.

There is no connection between the level of benefits that Social Security pays out and the debt that the government incurs when it borrows money from Social Security. Regardless of whether Congress slashes Social Security benefits or preserves them, national debt still goes up a billion dollars for every billion the government borrows from the program, the same as if it borrowed that money from China or anyplace else. Put plainly, cutting Social Security benefits will have only one immediate effect: reduced benefits. While benefit cuts would have a long-term impact on when Social Security revenues fail to match outlays (decades away, even with no change), they will have no impact whatsoever on annual deficits. None. Nada. Zip.

This means that our media-driven debate on Social Security is based on a fundamental misunderstanding about how Social Security operates — a misunderstanding that can be easily fact checked. If Social Security is cut in the name of deficit reduction, over a hundred million people would lose some of the small nest egg for which they saved over a lifetime of work without any progress toward the stated goal. Annual deficits would remain unchanged, forcing further cuts in services that most affect those who just gave up part of their retirement fund.

Shouldn’t debate begin here? Shouldn’t the public inquiry first determine whether this is fair, or will even work, before there are any discussions about how big the cuts should be?

Those of you having difficulty imagining that the Social Security debate could be this corrupted, please fact-check the underlying contentions for yourselves: 1) Social Security taxes only income below $106,800, and 2) Treasury bonds are issued in return for all the money taken from Social Security surpluses (i.e. the money is borrowed), which means that cuts to Social Security benefits will have no impact on long-term debt.

These two facts are all you need to know in order to conclude that every politician, pundit or news organization that advocates deficit reduction through cuts to Social Security is aiding and abetting — either knowingly or foolishly — theft from the middle and lower classes. (For an in-depth study of the current distortions, see also the recent paper by Roosevelt Institute Senior Fellows Robert Johnson and Thomas Ferguson, A World Upside Down: Deficit Fantasies in the Great Recession).

If the media won’t expose this, what will you do to spread the truth?

**For more on Social Security’s fiscal fitness, check out a series on its finances with Robert Kuttner, Nancy Altman and others.

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