They Don’t Owe Us, We Owe Them

Whatever their actual motives, when Ronald Reagan and Tip O’Neil made their celebrated deal to save Social Security, what they actually set in motion was a slow motion raid on the nation’s pension system. The increase in the payroll tax did not pay for current benefits; instead, it kept the Federal budget afloat during an era of lower and lower tax rates on the higher brackets. The net effect was a transfer of wealth and income from bottom to top. The deal didn’t even safeguard the long term health of the system because those who have always despised it have never counted the Federal bonds the system have accumulated during the long period of surplus as a legitimate investment.  Now that we face the prospect that some of the accrued savings may actually have to be paid back at some point, we’re hearing anguished screams. Hence the calls for raising the retirement age and lowering benefits by fudging the inflation adjustment.

What’s going on is not so different from what often happens in the private sector when CEOs and CFOs figure out ways of getting their hands on pension funds and using them to finance enormous executive pay packages just before their companies go bankrupt. Or what is happening in many state and local government systems where pension benefits that were negotiated in lieu of pay hikes never get paid out, presumably because a deal's a deal doesn’t count when the deal’s with a labor union. The sanctity of contracts only applies between parties of comparable power: otherwise, a contract is just another treaty with the Indians.

The peculiar thing about the current proposals to weaken Social Security is that they don’t make economic sense, at least if, perhaps quaintly, you think that the point of economic policy is not merely to increase inequality.  Lowering the incomes of retirees is bad for the economy in a period of inadequate demand; and raising the retirement age has the effect of increasing the pool of unemployed people at just the wrong time, with the predictable effect of lowering wages—when Social Security was first proposed, one of the arguments in its favor was that it would take many people out of the labor pool. Far from representing an unsustainable fiscal indulgence, the current system is already stingy beyond reason. Wonky debates about the best way to make it even stingier simply reinforce the false premises upon which our politics are currently constructed.