The Greenspan Commission Trap

Greenspan the monkey

In 1981, President Reagan established a commission to review the fiscal soundness of social security. The chairman of the commission was Alan Greenspan, who went on to head the Federal Reserve and lay the groundwork for the policies that wrecked the domestic economy. Not surprisingly, the commission determined “that there is a financing problem for… the short run, 1983-89″ (as measured using pessimistic economic assumptions) source. Ostensibly to solve the financing problem they encountered, the commission recommended increasing the Federal Insurance Contribution Act (FICA) tax rates to end the forecasted shortfalls and create a surplus trust fund to help defray future shortfalls in the Social Security program.

Translation – The commission told the government to raise Social Security taxes to protect against the potential short-term financing problem, and to create a trust fund for the revenue that was not immediately paid out in benefits. The trust fund would consist of treasury bills issued by the Treasury Department so that the excess revenues of the tax hike could be used to cover part of the annual budget deficit. This trust fund today holds approximately $2.3 trillion at the end of FY 2009 (monthly reports can be found here). Of that $2.3 trillion, it is unclear exactly how much of that is money that was collected from FICA tax and how much is accumulated interest on the principal. As an example of this, in fiscal year 2009, the trust fund made about $100 billion in interest from the Federal Government while surplus FICA taxes were over $141.9 billion.

On its surface this seems like a good idea. Put some money away for a rainy day sometime down the road to assure old people don’t spend their golden years eating dog food in a cardboard box. But, this isn’t a savings plan at all. It more accurately represents the money that the federal government stole from you and your employer under the guise of stabilizing the Social Security system.

If that seems like a strong statement, good. When looking at the aftermath of the Greenspan Commission’s recommendations, you have to put their recommendations into the proper context. In 1981, when the commission was conceived, Reagan had just become president and wanted to lower the Income tax rate for America’s highest wage earners. There were also reports of a funding shortage in the social security fund which needed to be addressed. He knew that in order to accomplish his desired tax cuts for the rich, since he was supposed to be a fiscal conservative, he would have to make up for the tax cut somehow. He also had huge spending plans that he needed to fund and spending on other programs couldn’t really be cut to the necessary extent. To prevent an increase in the public debt that would draw the ire of many of his supporters, Reagan followed the recommendation for the creation of a trust fund along with Congress. And for the rest of the 80’s and 90’s they cleaned up. Deficits grew which increased the overall debt, but more and more of the debt was being covered by the surpluses in FICA taxes (a similar scam is underway with the Medicare payroll tax as well) so the publicly-held debt didn’t grow as quickly.

I know, I am jumping to a huge conclusion about the people that crafted this policy but there are only two possible scenarios; this is more or less how Reagan, Greenspan and Co. planned it or, they are total idiots. I do not agree with much about the politicians and economists involved in this scheme, but I don’t think they are stupid. It seems obvious to me that the plan from the Greenspan commission accomplished two goals in one fell swoop, they shifted a big tax burden from the rich to wage earners while simultaneously hamstringing a major progressive policy for the future (in case you don’t realize it, the right wing hates Social Security).

Now if you go out in search of material to debunk my little theory, you may run across the old doosy that right wingers love to throw out – lowering top bracket tax rates actually increases tax revenue. Suuuuure. They will point to periods in history that followed rate cuts when revenue from the rich actually went up and assume (with purposeful ignorance) that the tax rates were the only thing holding rich people back from going out there and making more money. While it is true that high taxes are a disincentive, the main times that rich people make money is when the economy is growing. And in case you didn’t know, government policy (particularly under Republican leadership) has only as small role in the overall health of the economy.

Let me get back to that figure I mentioned earlier $2.3 trillion. That is how much money the government now owes itself. It is a real debt in that the government does pay interest on the debt, as I mentioned earlier, the interest cost for fiscal year 2009 was about $100 billion and that money does come out of the general budget. It is not a real debt though because the interest payments on the treasury notes are made with more treasury notes, which don’t hold a real value on the open market, unlike the cash payments made on interest held by the public.

That $2.3 trillion in the Social Security trust fund account for more than half of the total $4.3 trillion in government held debt. The remainder of the $4.3 trillion includes Medicare, Railroad retirement and the environmental superfund, to name a few. You can find reports on all of the individual intragovernmental holdings here.

In the future, I expect the true intent of the Greenspan Commission’s recommendations to be accepted as I have outlined them above. The government simply cannot maintain the huge burden of this debt over the long haul.