The GOP Attack on the Social Security Trust Fund and FDR’s Legacy

[Time for change]

In a speech during his first run for the Presidency of the United States, Franklin Delano Roosevelt noted that there “came a growing feeling that government was conducted for the benefit of a few who thrived unduly at the expense of all”. Cass Sunstein, in his book, “The Second Bill of Rights – FDR’s Unfinished Revolution and Why We Need it More Than Ever”, describes how FDR’s thinking progressed from the idea of the ‘few thriving at the expense of the many’ to government responsibility to ensure that everyone has an opportunity to make a decent life for themselves:

Roosevelt emphasized two rights that would be central to the new system. The first was the “right to life”, which means also the right to make a comfortable living… The second right was to property, “which means a right to be assured, to the fullest extent attainable,” of the safety of savings. This safety was necessary to assure people that they could live through situations that “afford no chance of labor: childhood, sickness, old age.”

FDR’s efforts on this front led to one of the most successful and popular programs in U.S. history – The Social Security Act of 1935. Prior to the passage of the Social Security Act, poverty among the elderly in the United States was about 50%. Elderly poverty has been proven to have an inverse relationship (See Figure 1) to Social Security expenditures, and by 2000 it was around 10% (though it increased substantially during the George W. Bush administration). There is no question that poverty in the elderly would skyrocket without Social Security. And that is the reason why no current day American politician will admit to doing anything to put Social Security at risk.

The Social Security Trust Fund is the system that accumulates money, by means of payroll taxes, to be paid to Social Security beneficiaries in order to enable the disabled and the elderly, as FDR intended, to enjoy a reasonably comfortable retirement. It became the center of a great deal of controversy during the administration of George W. Bush, due to Bush’s efforts to privatize the system. Thom Hartmann, in his new book, “Screwed – The Undeclared War Against the Middle Class”, explains how the Republican Party, beginning with Ronald Reagan and on through George W. Bush, has attempted to destroy the Social Security System. Social Security has been a major target of GOP hatred since its enactment in 1935, to the benefit of the wealthy few and the detriment of the great majority of American citizens.


Ronnie Reagan’s bait and switch ploy

As you can see from this chart, under FDR’s administration the tax rate for the highest tax bracket (top marginal tax rate) climbed to 94% by the time of his death in 1945. It then remained at or above 70% until 1981, with the Presidency of Ronald Reagan, who cut it to 28% by the time he left office eight years later. The effect on our national budget of this tremendous windfall for the wealthy was partially ameliorated by a reduction in the top tax bracket from about $215,000 when Reagan took office to about $30,000 by the time he left office. this amounted to a substantial increase in taxes for the middle class, notwithstanding the reduction in the top marginal tax rate. And not only that, but the regressive payroll tax was increased during the Reagan administration, and Social Security benefits were taxed for the first time, thereby constituting an additional tax burden for the middle class and the poor. As Thom Hartmann says, it was simultaneously the largest income tax cut (on the wealthy) and tax increase (on the poor and middle class) in our country’s history. Thus, despite all the bragging about Ronald Reagan’s tremendous tax reductions, the primary effect of his tax policies was to redistribute a massive amount of money from the middle class and the poor to the wealthy – not to mention a skyrocketing national debt.

Then, finding it difficult to run the government without adding to his record budget deficits, Reagan consulted with Alan Greenspan to find a way. Greenspan’s brilliant idea was to borrow the needed money from the Social Security Trust Fund. By doing that, so Greenspan claimed, the borrowed money would not have to officially be added to the national deficit, since it was simply a matter of the federal government borrowing money from itself.


Having his cake and eating it too

I am not able to think of a real life situation that better exemplifies ‘having your cake and eating it too’. Greenspan’s plan involved taking money out of the Social Security Trust Fund and replacing it with Treasury bonds (as an I.O.U.), in order to obtain money to run our government without the government having to borrow any more than Reagan had already borrowed. It was a win-win situation for him because he obtained the money he needed presumably without having to borrow it from an external source, and yet the source that he did borrow it from (the Social Security Trust Fund) presumably didn’t suffer because the money was replaced by secure Treasury bonds. Kind of like a magic trick, or as George H.W. Bush would say, “voodoo economics”.


“There is no trust fund – just IOUs”

Central to George W. Bush’s scheme to privatize Social Security is convincing the American people that the system is in grave trouble and needs something done to save it. After all, who would want to tamper with one of our country’s most popular programs unless it was in grave danger? Thus said George Bush in a 2005 speech:

A lot of people in America think there is a trust – that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you… But that’s not the way it works. There is no trust fund – just IOUs that I saw firsthand…

OK, Mr. Bush, but that’s not what your Party said when your ideological soul mate, Ronnie Reagan, replaced the money in the now non-existent (according to you) trust fund with Treasury bonds. Mr. Reagan claimed that the solvency of the trust fund was maintained with the Treasury bonds, which have the full power and prestige of the U.S. government behind it. But now that you want to hand OUR Social Security program over to your wealthy friends and backers, all of a sudden it’s not even a trust fund any more. Would you care to explain how that happened?

Of course, the truth of the matter is that the trust fund IS solvent because of those Treasury bonds, since they are generally considered to be a very safe investment. However, once we get to the point, which is not very long in the future, when we need to dip into the trust fund in order to pay new retiring beneficiaries, our government will have to back up those Treasury bonds with real money, and in order to come up with that money (since we are currently in debt up to our heads) it will have to either borrow it or raise taxes or both. And maybe when that happens our corporate media will finally start asking how we ever got to this point.


How might privatization affect our Social Security program and its Trust Fund?

The primary principal of George Bush’s privatization scheme for Social Security is to divert some of the money that would normally go into the Social Security Trust Fund into personal retirement accounts, at the discretion of young people who are currently paying into the system. The rationale for this is that the diversion of funds from the Trust Fund to private accounts will save the system by resulting in an increased rate of return for the diverted money.

There are several serious problems with this scheme that its advocates won’t talk about. First, as Paul Krugman explains, not only is it unrealistic to expect the investments in the private accounts to yield the rate of returns necessary (6.5 to 7% above inflation for the next 75 years) to result in a net gain to the system, but it is mathematically impossible unless the economy grows much faster than expected. And of course, a substantial fraction of the money diverted to the private accounts will be used to pay profits for the corporations that handle them. I’m talking about profits needed to pay for their overhead, lobbying, “donations” to politicians, and multi-million dollar salaries for their CEOs.

In other words, the whole idea of the program is to divert funds from OUR Social Security program into the hands of wealthy corporations and individuals. Even IF the returns on those accounts live up to the promises of George W. Bush – which is extremely unlikely – the whole scheme cannot possibly do anything to help people who are currently retired or who will be retiring in the not very distant future. Therefore, the system which they have paid into for several decades will be put at risk, with no possibility of benefit to them. And finally, the whole scheme subverts the main purpose for which the Social Security Act was devised – which is to reduce poverty and ensure a comfortable retirement for people after a lifetime of work.


What is their motive for doing this?

I don’t necessarily agree with Thom Hartmann’s full explanation for the motives behind Bush’s privatization scheme. We both agree that a major motive is to enrich the Bush administration’s wealthy friends and supporters. That should be obvious to anyone who is familiar with our current Social Security system and Bush’s plan to destroy it, as well as to anyone who is familiar with George W. Bush, period.

But Hartmann adds two additional explanations. One is that by destroying our Social Security program before our government has to begin buying up the Treasury bonds that Reagan used to borrow from the Trust Fund in the 1980s (which will increase our national debt even further), the fraud perpetrated by Reagan will remain undiscovered. And thus, the reputations of Reagan and the “supply side” economics that he perpetrated on us will remain intact.

Hartmann’s other explanation of their motives is that, by giving young people the option of partially avoiding having to pay into a system that helps to support elderly retired persons, the Republican Party can re-capture some of the youth vote that it has lost in recent years. In other words, they are playing off two different demographic groups against each other.

I don’t disagree with either of these explanations. It’s just that I prefer to stick to the simpler and most obvious explanation – the diversion of OUR money to the wealthy.


George Bush’s Social Security privatization scam in perspective

The roots of Bush’s Social Security privatization scheme go back to the hatred of FDR and his programs by an elite class of wealthy individuals who have beliefs that are …. well, the beliefs of today’s leaders of the Republican Party. FDR first campaigned for President during the midst of the Great Depression, on a platform that advocated the need for government to level the economic playing field in our country and thereby lend a helping hand to the least fortunate among us. As he said in accepting his second nomination for the Presidency of the United States:

Necessitous men are not free men. Liberty requires opportunity to make a living – a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for. For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor – other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

This was no mere campaign propaganda. Roosevelt deeply felt the need for government to help people, and he vigorously acted upon his beliefs. And that is why he is widely regarded as the second greatest President in the history of our country, while at the same time being venomously hated by many of today’s Republicans.

Consequently, since the onset of the Reagan presidency in 1981, the Republicans have pushed, with much success, for the abolishment of the programs, policies, and philosophy that constitute FDR’s legacy. They have done this through a massive distribution of the tax burden, through subsidies to wealthy corporations such as those in the energy industry, by limiting the freedom of labor unions to function, and by de-regulating as many industries as they can. The result has been an increase in poverty and a greatly widening wealth gap that is manifested by an economy in which CEOs average 431 times the annual salary as their average employee.

These are just some of the starkest indications of the GOP attempt to destroy FDR’s legacy, the foundations for which can be briefly and vividly summarized by these thoughts of his:

I am getting sick and tired of these people on the local relief rolls being called chiselers and cheats… I have never believed that with our capitalistic system people have to be poor. I think it is an outrage that we should permit hundreds of thousands of people to be ill clad, to live in miserable homes, not to have enough to eat; not be able to send their children to school for the only reason that they are poor.

The attempted attack on Social Security is one more egregious and surreptitious attempt to destroy FDR’s legacy and revert back to the Gilded Age of the Robber Barons. FDR is probably rolling over in his grave.

I fervently hope that we can now begin to reverse the attack on FDR’s legacy, now that we have a Democratic Congress and an apparent mandate from the American people. I hope that our new Congress will not be shy about invoking the name, the principles, and the policies of FDR, thereby rehabilitating the dreaded “liberal” label and getting our country back on the road to democracy and the equality of economic opportunity.