Why Ezra Klein is Wrong About the Payroll Tax "Holiday"--and FDR is Right

In his post yesterday, “The payroll tax cut, Social Security, and the problem of the trust fund,” Ezra Klein explains why he does not share the opposition of many liberals to a payroll tax “holiday,” who believe that it would ultimately drain Social Security’s finances, and force the general fund to pick up the slack. To his credit, Ezra agrees that these fears are legitimate. Only, unlike other progressives, he just doesn’t care.

Here is the relevant quote:

But some liberals are understandably concerned that the payroll cut will be extended indefinitely. Then Social Security loses part of its long-term funding. And then what? More benefit cuts? Privatization?
I say, bring it on.

Ezra’s argument is two-fold. First, replacing a portion of payroll taxes with money from the general budget would mean funding Social Security with taxes that are less regressive than payroll taxes, thereby lightening the middle class tax burden. Second, Ezra claims Social Security’s “funding structure is now forcing cuts that [he] thinks are a bad idea.” Making Social Security benefits less dependent on payroll taxes, Ezra continues, would ensure Social Security steady funding, regardless of periodic demographic changes like the current baby bust that will prevent Social Security from “paying for itself” in the coming decades. As a result, Social Security need not face a long-term financial shortfall–now, or at any point in the future.

Unfortunately, Ezra bases his argument on a wishful misreading of American politics, and a fundamental misunderstanding of Social Security as a program. First, it is not Social Security’s structure that is responsible for the benefit cuts that will occur if a number of Beltway policy wonks have their way. It is instead conservatives, who have hated Social Security from the very beginning, and center-right budget hawks, who think cutting Social Security is an easier (more politically feasible perhaps?) way to reduce the deficit—than let’s say, radically cutting the defense budget, restoring to taxes to their 1990s levels, and continuing to dramatically cut our nation’s health care costs—who are responsible for benefit cuts being such a real possibility. It is, frankly, naïve to think that if Social Security were to have access to funds from the general budget that these groups would lose their political influence over the program’s future.

In fact, it has been the conflation of Social Security with other budgetary issues that led Social Security to be included in the agenda of the National Commission on Fiscal Responsibility and Reform, which is recommending massive cuts to Social Security’s benefits. It was only after relentless pressure from advocacy groups, that Bowles and Simpson revised the justification for their Social Security cuts, claiming their proposal was intended to shore up Social Security’s finances, not reduce the deficit. Prior to that, they freely admitted that cutting Social Security was a necessary part of deficit reduction. Before an audience of bankers in North Carolina after Commission was first convened, Bowles said, “We’re going to mess with Social Security because that’s where the money is.”
We cannot base how we structure the program on whether it incurs the ire of deficit hawks and advocates of benefit cuts of various other sorts. They have been around since the days of Alf Landon, and we will just have to keep on pushing back against them. We can only speculate that the latest onslaught would have been far worse if it could be said that Social Security actually contributed to the deficit.

Further, Social Security’s history has shown that, given the proper political pressure and tight timeline, Congress is capable of acting to ensure that full benefits will be paid, regardless of temporary demographic fluctuations. This occurred most memorably in 1983, when, facing what was truly an imminent financial crisis, Congress passed legislation swiftly and decisively to shore up Social Security’s finances, while cutting benefits minimally and temporarily. What is more, as Ezra has noted, the declining birth rate is slated to stabilize after 2035, which means that the current demographic issues are only temporary. It would be a shame if we restructured the entire system just to respond to a temporary challenge.

But Social Security’s payroll tax-to-Trust Fund “loop” structure has merit of its own. It is unique among government programs in that the discreet nature of its funding is written into its legal framework. Before dismissing the “argument in liberal circles that Social Security’s funding structure, rather than its benefits, are what keeps it safe,” it is crucial to understand exactly what Social Security’s funding structure legally means.

The Social Security Trust Fund is not, as Ezra put it on “Countdown with Keith Olbermann” this past Tuesday night, an “accounting fiction.” The Social Security Act is explicit in its creation of the Trust Fund, which can be found in Social Security Act, 42 U.S.C. § 401(a), (b), and (c). The Trust Fund is a legal agreement that binds the government to use Social Security payroll tax contributions to fund Social Security, and Social Security alone. It is not “usually” used to pay for Social Security, as Ezra asserts, they always are.

The Trust Fund invests the contributions it receives in government bonds, so technically the government “borrows from the Trust Fund.” But those loans, like any other US Treasury bonds, are insured by the full faith and credit of the United States government. Here is the relevant line in the Social Security Act obligating the government to fulfill its obligations to the Trust Fund (emphasis mine):

Each obligation issued for purchase by the Trust Funds under this subsection shall be evidenced by a paper instrument in the form of a bond, note, or certificate of indebtedness issued by the Secretary of the Treasury setting forth the principal amount, date of maturity, and interest rate of the obligation, and stating on its face that the obligation shall be incontestable in the hands of the Trust Fund to which it is issued, that the obligation is supported by the full faith and credit of the United States, and that the United States is pledged to the payment of the obligation with respect to both principal and interest. (Social Security Act, 42 U.S.C. § 401(d))

While the Trust Fund legally prevents the government from misappropriating payroll tax contributions for other purposes, the Social Security funding “loop” cuts both ways. Just as the government cannot borrow funds allocated for Social Security, so too Social Security cannot borrow from the general budget. In arguing that the current arrangement holds Social Security back, Ezra has repeatedly acknowledged Social Security’s inability to borrow to pay benefits, so it is not clear why he takes the government’s commitment to Americans’ payroll tax contributions any less seriously.

The advantages of keeping Social Security in a closed funding loop separate from the general budget are there for all to see. Every year Congress cuts some programs and increases spending for others. Even when it increases spending, however, it often fails to allot funding for it, forcing the program to be cut by future politicians when the debt grows so big that funding must be cut. It does not mean that Social Security has been immune from cuts or other modifications. But it does insulate it from the annual budgeting process, forcing Congress to deal with it independently, which requires much greater political energy to do.

Although I would love to believe Ezra that Social Security would enjoy massive public support if it were not as dependent on payroll taxes, the history of the last thirty years, to say nothing of the current political climate, suggests otherwise. After decades in which conservatives have successfully demonized government intervention of all kinds, it is Social Security’s unique structure that has saved it from the fate of almost all other government programs that periodically land on the chopping block. Unlike income taxes that constantly illicit suspicion and criticism for funding government programs that one group or another thinks could be spent better, everybody knows where their money goes when they contribute payroll taxes. In short, the payroll tax-Trust Fund “loop” may not be the only thing keeping the program popular, but it is surely the thing that guarantees it.

Consider the spectacle of Tea Party activists holding signs saying, “Keep your government hands off my Social Security.” The Tea Party has earned much mockery for statements of this kind, but they reveal a lot about mainstream America’s feelings toward Social Security (and Medicare for that matter) vis-a-vis “government” in the abstract. It is unlikely that those Tea Party activists are so ignorant as to believe that Social Security comes from an entity other than the government. They just have a greater sense of ownership of Social Security, because they know their tax dollars are going toward a tangible return that the government is obligated to provide them. The use of “government” on such a sign is a metaphor for a lack of faith in the government’s handling of taxpayer dollars in programs other than Social Security. Hence the false juxtaposition of “government” on the one hand, and Social Security on the other.

In addition, the universal and flat nature of the payroll tax, which Ezra critiques, while not ideal, is an essential component of Social Security’s popularity. It assures middle class Americans, who associate government intervention with redistribution to the very rich and the very poor, that this program is different. Social Security is not about the government deciding who “deserves” to pay more and who “deserves” to pay less. Everyone pays the same share of their income into the program (save for the very richest, but that can be remedied), and in turn, everyone is insured by it when they retire, die or become disabled. And even the regressive nature of the tax formula is outweighed by the progressive nature of the benefit formula (which, conveniently, is less apparent to the layman). While benefits are earnings-related, they are also redistributive. The poorer you are, the higher the rate at which your benefits replace your working income.

One of the “liberals,” Ezra takes issue with for thinking that Social Security’s structure is what ensures public support for it, is none other than the program’s creator, Franklin Delano Roosevelt. When pressed about the impact of payroll taxes on the economy, FDR said:

I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.

But even if, contrary to what FDR predicted, the public continued to hold Social Security in high esteem despite the lack of a firm connection between benefits and payroll taxes, any number of politicians who have never been fond of the program would now have access to Social Security’s purse strings. Social Security would undoubtedly go the way of other discretionary social safety net programs in the general budget that lack legions of lobbyists to defend them. Like unemployment insurance and food stamps, it would be in constant jeopardy of cuts.

Klein’s conclusion that because other programs that don’t “pay for themselves” and depend on funding from the federal government have not yet been cut, neither will Social Security in a comparable situation, is laughable. The examples he cites are: the Defense Department, the United States Congress, the mortgage interest tax deduction, farm subsidies, Medicaid, and the Earned Income Tax Credit.

Let’s start at the top. Really, the United States Congress? That’s like saying we could pinch pennies by getting rid of the vice presidency, or halving the Supreme Court. Congress will, at the very least, always allocate Congress the money it needs to function. The Defense Department, in its current bloated size, the mortgage interest tax deduction and farm subsidies have all been fought for and protected for decades by multi-billion dollar industries with massive lobbying largesse.

Medicaid and EITC actually hurt Ezra’s case. Medicaid’s fortunes have risen and fallen with the political tides. It has frequently been cut with little political fallout. And just because the EITC is still around, that does not mean we should take for granted that it will survive future cuts. The EITC was only renewed this year as part of the dreaded Bush tax cut deal. Can you imagine if Social Security’s fate hung in the balance of those negotiations?

Moreover, even if most Americans want to preserve funding for a program, they do not send millions of dollars’ worth of lobbyists to Washington to defend cuts that mostly affect the poor. Social Security, like Medicaid, the EITC, and other soft and mushy government programs, has no such luxury. In fact, the billionaires that protect other budget items would have much to gain from depriving it of funding, either in the form of nominally lower taxes, or access to fees from private Social Security accounts. If exposed to the normal budgeting process, there is reason to believe that not even popularity could save Social Security.

Why not frame the debate another way? We should fund Medicaid, EITC, TANF, unemployment insurance and food stamps more like Social Security, so that their fate is not subject to changing political winds, and the public has greater faith that the government is using its money properly. Let’s create more trust funds, not weaken the one we already have.

Worse still, the payroll tax “holiday” comes at a time when confidence in Social Security’s financial integrity is at a record low. Scores of Republican candidates who swept into Congress this fall did so in part by claiming that President Obama and the Democratic Congress had raided the Social Security Trust Fund. Perhaps bolstered by the lack of a COLA (cost-of-living adjustment) this year, the “raided Trust Fund” myth has begun rearing its face all over the country–most notably in the “Get your government hands off my Social Security” signs that I have already mentioned. Of course, no such thing is true, or even possible. But if Congress decided to lower payroll taxes and replaced it with funds from the general budget, it would give credence to the Trust Fund myth, and its close sibling, the tried-and-true myth that Social Security is “broke.” Social Security’s opponents thrive on these misconceptions, because against the prospect of Social Security disappearing entirely, massive cuts and privatization schemes start to sound just fine.

And even if tearing down the wall between the Social Security Trust Fund and the general budget were a great idea, shouldn’t it be done more explicitly, so the country knows what it is getting itself into? Many people out there probably think a payroll tax “holiday” is great, but lack the policy expertise to understand the full ramifications it would have for the program. Surely Ezra would agree that a change of this magnitude should be done in a more forthright fashion.

Perhaps Social Security would be protected as part of the general budget, perhaps not. Nobody can predict the future. But from one guy who cares about Social Security to another, I have to ask, Ezra: why risk it?

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