The selection of Paul Ryan as the Republic vice presidential candidate has stirred up eternal arguments over America’s entitlement programs. This has in turn prompted the standard back-and-forth over whether Social Security constitutes a retirement account system, or is just another federal expenditure. Liberals (and I do consider myself one) tend to vehemently affirm the former and deny the latter. Here’s a recent-ish example from Noah Smith.
I’ve always found this strange – why are we even talking about the government’s unfundeded commitment to Social Security if it’s not a government expenditure? If it’s a system of retirement accounts, then once the federal government pays back what it has borrowed from those accounts, any obligation to pay for Social Security would be over with. At that point, if Social Security revenues (from payroll taxes) were less than its expenditures, it would go bankrupt. A bad outcome for people expecting benefits, but definitely not a fiscal catastrophe for the US. This is consistent with the law on Social Security – in Flemming v. Nestor, the Supreme Court ruled that you have no property rights over expected Social Security payments. Social Security is not savings – you do not own the funds in any legal sense. Congress can decide to stop paying you, or indeed all Social Security beneficiaries.
Now, I do understand what liberals are trying to do here. They think that they need to defend Social Security, and that people won’t like it as much if they think it’s a government program.* But it’s a really popular program – there’s no need for these rhetorical hijinks. I have my reservations about how the Social Security works, but it’s undeniably a vote-winner. Why trip over yourself about how it’s being framed?
And this isn’t a costless strategy. Framing Social Security as an retirement account system allows Republicans to carry on with one of the craziest lies in politics: the claim that over 50% of Americans pay no federal income taxes. That’s true if and only if we pretend that the payroll taxes that nominally fund Social Security and Medicare aren’t income taxes. But what are they, exactly? Are they your money? Yes. That gets taken away from you? Yeah. By the federal government? Yep. And are they mandatory? Totally non-optional. Does the money get spent on whatever the government wants, without regard to the name of the tax? Absolutely. They are taxes, but arguing that Social Security is a savings scheme lets Republicans pretend they aren’t and gain the advantage in the overall fight over entitlements. “See?” they say, “we’re in a death spiral of increasing numbers of listless, no-tax-paying leeches!” This is complete nonsense but since Democrats don’t want to talk about payroll taxes as taxes, no one ever heads it off.
It gets worse: payroll taxes are wildly regressive, too: they are 7.65%** of your income up to around $110,100, then that’s it, you don’t pay any additional payroll tax no matter how much you make. The savings account rhetoric leaves them out of the conversation when we discuss the equity of our tax code. It also means we can’t discuss unlinking benefits from income or removing the cap on payroll taxes, each of which could do a lot to make the Social Security system sustainable. To win a single, unimportant fight about what Social Security “really” is, Democrats have conceded almost the entire war over the size of government.