Social Security Trust -- Or, Never Lend Money to a Conservative

Never lend money to a conservative. That's one conclusion to be drawn from recent attacks on Social Security by Bloombergcolumnists Megan McArdle and Ramesh Ponnuru. Apparently promises, even legally executed ones, don't mean much to their crowd.
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Never lend money to a conservative. That's one conclusion to be drawn from recent attacks on Social Security by Bloomberg View columnists Megan McArdle and Ramesh Ponnuru. Apparently promises, even legally executed ones, don't mean much to their crowd.

McArdle recently expended 1249 words attempting to evade the government's debt to the Social Security Trust Fund, never really getting much beyond the five-word assertion that "the trust fund isn't real." Ponnuru tried to argue that a cut isn't really a cut.

It's an odd spectacle to watch rightwingers, with their avowed hostility toward "big government," arguing that the federal government should break its commitments and stiff middle-class retirees. Luckily they're not very good at it.

What Is "Reality", Man?

"The trust fund isn't real." This claim is evergreen on the right -- and it's wrong. Social Security's trust funds, which currently hold more than $2.8 trillion in surplus, are very much real, creatures of both law and public trust. Social Security is required by law to keep its funds separate from the general budget, because all of its benefits must be financed solely by the payroll tax.

The federal government borrowed from Social Security, using legally-executed instruments (both bonds and certificates of indebtedness). This obligation is as real as any other government debt, including those owed to Goldman Sachs or any other wealthy holder of Treasury bonds.

But McArdle, like others of her political persuasion, is eager to sever the binds of legal and moral obligation surrounding this debt. Why? One suspects an inmate hostility to government programs of any kind, especially successful ones like Social Security, combined with the desire to take the seniors' money and run -- to the next tax break for the wealthy.

Poor things. They try so hard.

Seriously: Who, outside of stoned sophomores in a college dorm room, would question the "reality" of the trust fund? What does that question even mean? Is a parent's trust fund for their child "real"? What about a corporate pension trust?

For that matter, are corporations real? Hey, is money real? I mean, it's just a symbol, man. Right?

Trust Funds Are People, My Friend. They're People.

Fortunately there are answers to those questions. All the things we just mentioned -- trust funds, pensions, corporations, currencies -- are legal constructs. The economy functions on such devices. And, as it turns out, the legal construct of a trust is even older than that of a corporation.

A trust is a legal entity with divided legal and beneficial ownership - that is, with trustees and beneficiaries. Like other trusts, Social Security's two trust funds (not one, as McArdle writes) are controlled by trustees with fiduciary responsibilities. American working people and their families -- future and potential recipients of retirement or disability benefits -- are the beneficial owners, and Social Security's trustees are legally obligated to act in their -- our -- best interests.

In fact, the trustees were sued in 1985 for violating their fiduciary responsibilities, after Treasury Secretary James Baker failed to make interest payments to Social Security on time. The case was brought on by none other than Eliot Richardson, the hero of Watergate who had been fired as Attorney General by Richard Nixon. (Baker paid up before the case could be decided.)

Disorder in the Court

McArdle also cites a Supreme Court case called Flemming v. Nestor, dredging up an oft-repeated right-wing interpretation of that case which argues that seniors have no inherent right to Social Security benefits. That's another misreading of the facts. The plaintiff in that case, Ephraim Nestor, was an alien who'd been deported -- and who had lost his Social Security benefits -- for belonging to the Communist Party. The court allowed that on the grounds that Social Security was not a contractual relationship between the government and an individual.

Many legal experts believe that this Cold-War era decision was primarily driven by the anti-Communist fervor of the times. Today it might be decided very differently. In any case, the Court only addressed the issue of an individual contract. The Court did not say that seniors as a group have no right to Social Security benefits.

Here's some language from the Court's ruling which conservatives always leave out, which comes after they held against Nestor's specific claim: "This is not to say ... that Congress may exercise its power to modify the statutory scheme free of all constitutional restraint."

A Political and Moral Bond

The intent behind Social Security's financial structure was, in fact, to create a binding obligation. Roosevelt said as much at the time, telling an advisor:

We put those payroll 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.

The Flemming v. Nestor decision did nothing to reduce that those "legal, moral, and political rights." But that's not the only straw grasped by McArdle. Early in her commentary she says this:

If you want to spend a hilarious and illuminating 15 minutes, try to convince a financial analyst that the Social Security trust fund exists and is important. This is what they will tell you: "It's a consolidated entity. The treasury bonds in the trust fund are an asset of one part of the government and a liability of the other part. Net effect on the balance sheet: zero."

McArdle and I clearly have very different conceptions of what's "hilarious." That aside, here's a tip for McArdle's unnamed "financial analyst": If the Treasury Secretary can be sued over something, it exists.

McArdle also dismisses the "reality" of the trust funds because Congress has the power to change the law and keep the money. But Congress could effectively revoke all those Treasury bonds held by Goldman Sachs, too, simply by taxing the proceeds at 100 percent.

Try telling a conservative that Lloyd Blankfein's bonds aren't real.

Cut? What cut?

As for Ponnuru, he challenged a statement from Social Security Works which said that "If Senator Marco Rubio had his way, Social Security's very modest benefits, averaging just $1,330 a month for retired workers, would be cut."

"That's not true," insists Ponnuru.

Is he right? Rubio talked about two things: raising the Social Security retirement age and lowering the formula for cost-of-living adjustments. The former would reduce the total amount received during a person's lifetime. The latter would reduce the amount beneficiaries receive in inflation-adjusted dollars, which is how such things are always measured.

When someone is scheduled to receive X dollars and someone suggests giving them less than X instead, that's a cut. That wouldn't be open to debate in an honest discussion. But that's not what we're having here.

An Honest Conservative

To be sure, not all conservatives are dishonest. I had a refreshing on-air conversation about Social Security's trust funds with a conservative radio host out of St. Louis once. "Aren't they just IOUs?" he said, echoing the stock right-wing line.

"Don't you pay your IOUs?" I asked him. There was a long pause.

"You know," he said, "that's a pretty good question. I never thought about it that way."

"Do you want to live in a country that doesn't pay its IOUs?"

"No," he said, "I don't." He promised to reconsider his views on Social Security -- and I believed him.

That's the kind of conservative I respect. He and I may disagree on any number of economic and foreign policy issues, but at the deepest level I suspect he wants what I want: a country which is as good as its bond -- in both meanings of that word.

Wrong by a Landon-Slide

As for McArdle and Ponnuru and their ilk, none of their misguided arguments are new. In fact, Alf Landon deployed many of the same arguments in 1936 when he ran against Franklin D. Roosevelt. (His campaign slogan was "Let's make it a Landon-slide," and he did - for Roosevelt.) Here's a campaign news item from Time magazine, published on November 9, 1936:

"Said Republicans ... when you are very old, you will have an I.O.U. which the U.S. Government will make good if it is still solvent."

Nearly eighty years have passed, and this threat of default has remained untrue for generation after generation.

These fear-mongering arguments were also dismissed by a 1950's-era Advisory Council on Social Security, convened by President Dwight D. Eisenhower. Its report, "Misunderstandings of Social Security Financing," should be required reading for every pundit and politician currently gunning for Social Security. If you find a hard-copy version, feel free to lend it to a right-winger like McArdle or Ponnuru.

Just don't expect to get it back.


In the spirit of full disclosure: Social Security Works sponsors my radio program, The Zero Hour.

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