Shock Therapy: Three-Card Monte

Part 2

In 1983, the hike in Social Security taxes was sold to the public as a way for the boomers to pre-fund their own retirement. Kind of like putting away a nest egg at the local savings and loan. Sounded reasonable.

But in that scenario, you’d be loaning your money to a separate entity, who’d pay it back — plus interest — from its own money.

In the case of the 1983 reform, Social Security taxpayers effectively loaned money to the Federal Government, and their children (in their role as regular taxpayers) will pay it back — plus interest.

No easing of the burden for the next generation has occurred; they’ll pay about what they would have paid anyway, even without the 30 years of extra payments from their elders. Plus interest.

Everybody involved in the 1983 “reform” knew this: Reagan, Greenspan, the bipartisan Commission that made the recommendations and the bipartisan Congress that passed them. Any surplus Social Security money, by law, must be loaned to the government in exchange for government bonds. That hasn’t changed since 1935.1

The only difference in the past was, once a cushion was built up in the Trust Fund reserve, no significant yearly surpluses (or deficits) were allowed to accumulate. Taxes taken in were kept in rough balance with benefits going out.2 From the 1950’s to the 80’s, the Trust Fund balance stayed at under 200 billion in inflation-adjusted value.

Year Current $ (Mils) 2005 $ (Mils)
1943 4,820 55,709
1953 18,707 132,760
1963 20,715 129,015
1973 44,414 199,960
1983 24,867 48,434
1993 378,285 507,152
2003 1,530,764 1,611,323
2005 1,858,660 1,856,660

“Pay as you go” was policy for over 40 years; it worked very well. With an overhead of less than 2%,3 Social Security never missed a check. It’s the most successful and longest-lived retirement security program in history.

It took a financial wizard like Alan Greenspan to think of generating increasing surpluses. But since they don’t ease the burden on the next generation as advertised, one has to ask: why?

First, note that in 1983 Social Security taxes applied only to the first 32,000 of wage income, and now apply only to the first 97,000. Wage income over the cap isn’t subject to Social Security taxes.4 Not a concern for most of us, since 90% of us make less than 90,000 a year, and every penny is taxed.5

Second, note that Social Security was designed as a stand-alone, transparently self-financing program on purpose, so that its taxes and benefits wouldn’t be mixed in with the general budget for nefarious ends.

But that’s just what happened in 1983. While Greenspan and company were busy raising Social Security taxes on the bottom 90%, the Reagan Administration was merrily cutting income and capital gains taxes, mainly for folks making over 200,000.

In 1979 the top income tax rate was 70%, assessed only on income above 200,000, and the capital gains tax was 28%. By 1986 the top rate was 50%, and the capital gains tax was 20%, with 60% of income excluded.6

Here the “reform” begins to look like a three-card monte shuffle. Raise Social Security taxes on ordinary working people to generate a surplus. Borrow the surplus into the general budget. Whoa Nelly, look at that extra money! Someone needs a tax cut!

The super-rich and big businesses gain; ordinary workers and small businesses lose.

Predictably, increasing budget deficits were the result. Both Bush I and Clinton re-jiggered taxes to generate more revenue, but never back to their pre-Reagan levels at the top.6

Now here comes Bush 2, and he wants to lower taxes even more. Who’s there to help but Alan? In 2001 Greenspan testified in support of Bush’s tax plan.7 Wonderful idea, he told Congress. Clinton’s budget surpluses are just too big. We’re in danger of paying off the federal debt too fast, and then whatever would we do with all the money rolling in? Someone needs a tax cut. And once again, dear reader, that someone
isn’t you.

Never mind that without borrowing the Social Security surplus, Clinton never produced a general budget surplus. But who bothers with details like that? With a wink and a nod from Alan, Congress passed Bush’s tax cuts. Currently the top rate on capital gains is 15%, and the top rate (on income over 250K) is 35%.6

The Social Security tax is 12.4%. Half is taken off the top of employees’ checks and half is paid by employers. Both halves are part of the employee’s compensation. So in effect, the kid who works for $5.15 an hour at the Burger Palace gets taxed at almost the same rate Bill Gates does when he sells a property for capital gains.

But here’s another wrinkle that’s not as immediately obvious: the owner of the Burger Palace also takes it in the shorts. Small and medium-sized businesses use more labor than large ones to generate a unit of production and profit. Every increase in Social Security taxes hits a small business harder than a giant corporation because the giants are less labor-intensive. Compared to a 28% cut in the top income tax rate, a 2% increase in payroll taxes is insignificant to Bill Gates; each of his 79,000 employees generates over 100K in profits.8

For the owner of the Burger Palace and his 5 employees generating only 3K each, it’s a different story. But hey — by Greenspan’s style of reckoning, who needs an inefficient Burger Palace when you have a shiny corporate Burger King?

* Social Security Administration, “Performance of Social Security Trust Funds, 1937-2005.”

See Part 1.

  1. Social Security Administration, “Agency History.” []
  2. Congressional Budget Office Historical Budget Data, “Revenues, Outlays, Surpluses, Deficits and Debt Held by the Public, 1962 to 2006.” []
  3. Social Security Administration, “Administrative Expenses.” []
  4. Urban and Brookings Institution Tax Policy Center, “Historical Social Security Tax Rates.” []
  5. Citizens for Tax Justice 3/07, “Background Information on Incomes and Income Ranges.” []
  6. Citizens for Tax Justice, “Top Federal Income Tax Rates on Regular Income and Capital Gains Since 1916.” [] [] []
  7. 2001 Tax Cuts were Justified, Greenspan Maintains,” Washington Post, 3/16/05, ret. 10/07. []
  8. Gates profit/employee, MSFT Investor Relations (July 19, 2007). “Microsoft Fourth Quarter FY 2007 Earnings Release: Microsoft’s Annual Revenue Surpasses $50 Billion“. microsoft.com, Ret. 07/08/15. []
Hannah B. is from the Pacific Northwest and works in healthcare. She can be reached at: bbhannahb@yahoo.com. Read other articles by Hannah, or visit Hannah's website.

8 comments on this article so far ...

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  1. Deadbeat said on November 7th, 2007 at 9:01am #

    This is a great article on a topic that is rarely discussed. The rhetoric is about “taxes” and rarely is regressivity verses progressivity discussed. Reaganomics was about increasing the level of regressivity and increasing tax burdens on working people and away from the rich.

    One would ask why working class Americans vote to put Reagan in power so they can see their tax burdens increased. The answer RACISM. Reagan inaugurated his campaign in Philadelphia, MS where civil right workers were assassinated. Reagan scapegoated African American (and Liberals who were distancing themselves from people of color) as the source of America’s ills.

    White Americans bought the canard hook line and sinker. They blamed blacks for the so-called “tax and spend” Liberalism. Whites pretended that they were not beneficiaries of social spending (affirmative action for whites especially after WWII where housing and other government programs were denied to blacks due to discrimination) and the myth that they pulled themselves up by their bootstraps. Liberals began to abandon social spending and redistribution with the election of the so-called pro-business “New Democrats” whose arose in 1974 after the drubbing of George McGovern in 1972.

    The author refers to the 1986 Tax “Deform”. The major sponsors of that huge tax cut for the rich were Liberal” Democrats Bill Bradley and Dick Gephardt.

    Another backdrop was that by 1980, White America also began to increase the level of hatred towards Arabs with the 1979 Iranian Revolution and their spike in oil prices. This coming not too long after the first spike in oil prices in 1973. Jimmy Carter then permitted then Fed Chairman Paul Volker to dramatically raise interest rates to induce a major recession causing white workers to then seek scapegoats. People of color where the obvious scapegoat. Thus the key to rise of Reaganism was the white working class (aka. Reagan Democrats).

    Racism (and Zionism) is a cancer in the United States and the impetus of the crisis occurring in the U.S. today.

    The biggest problem is that the working class WANTS it this way and they are making no attempts to bridge this divide especially on the left. White leftist like their privilege and so long as they prefer to wallow in their “privilege” the RICH WHITES will continue to rob and transfer wealth from everyone.

  2. Dr Coles said on November 7th, 2007 at 10:33am #

    The full retirement age is based on maintaining a 50% death rate, so the government does not have to pay any paid for benefits but to half of the investors. The government gets 15% of all wages in America and is so incompetent as an investment manager, if we could we would have fired them, they do not invest our money and grow the funds. The problem with Social Security is totally caused by government. No, matter your political party affiliation, and setting aside your thoughts on issues. We all need to remember what it is to be an American Citizen. We need to make sure our elected representatives obey their Oath of Office and keep their Oath of Allegiance. See http://tinyurl.com/2znnvl Know whom you are voting for.

  3. Hannah B. said on November 7th, 2007 at 1:00pm #

    Thank you both for your comments, I appreciate the feedback.

    I would like to politely disagree with some of it, though. I believe Reagan’s victory and the move to the right in US politics is more complicated than “racism,” and the thesis of this article is that there is no “problem” with Social Security at all; that the “crisis” is entirely manufactured. I hope you’ll read Parts 3-5 to hear why. Thank you!

  4. Lloyd Rowsey said on November 7th, 2007 at 7:46pm #

    The month of November’s quotation, from my Che Gueverra 2007 calendar is, “Knowledge makes us accountable.” How in the name of God, Marx, or mathematics could anyone be more accountable after reading this article, Shock Therapy: Three Card Monte, and its predecessor of day-before-yesterday, Shock Therapy Part 1?

  5. Deadbeat said on November 11th, 2007 at 10:16am #

    Thank you both for your comments, I appreciate the feedback.
    I would like to politely disagree with some of it, though. I believe Reagan’s victory and the move to the right in US politics is more complicated than “racism,” and the thesis of this article is that there is no “problem” with Social Security at all; that the “crisis” is entirely manufactured. I hope you’ll read Parts 3-5 to hear why. Thank you!

    Reagan clearly promoted a regressive ideology and economic policies. My point is not about the ruling class rightward policies movement. The fact is that the ruling class could not achieve power if they could not in some way relate to the masses of people who elected them into power. That meant convincing the majority white population to vote for their rightward policies. If as the author responded that is was more complicated than racism then why didn’t Reagan just come out and tell the white populous that he intended cut taxes on the rich and lie about Social Security and shift the tax burden away from the progressive income tax and toward regressive SS tax and sales taxes.

    The key to Reagan’s victory was the APPEAL to “Reagan Democrats” and the key to that was racism. Unfortunately many on the left choose to ignore, dismiss, or diminish the appeal of racism and its effect on the body politics.

  6. hannah said on November 11th, 2007 at 11:19am #

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    I think it’s pretty obvious why he didn’t; those policies aren’t supported by the majority of people. They have to be disguised in the rhetoric of “Morning in America,” get government off our back, etc.

    I don’t deny Reagan played the race card in his campaign. I simply disagree that race was the only, or indeed the main, reason for his victory.

  7. Deadbeat said on November 11th, 2007 at 9:01pm #

    I don’t deny Reagan played the race card in his campaign. I simply disagree that race was the only, or indeed the main, reason for his victory.

    Ok, you stated twice that you don’t believe that race was the primary factor in Reagan appeal among voters (despite the clear racial significance of Reagan inaugurating his campaign in Philadelphia, MS) then can you articulate what factor or factors where of primary significance?

    Thanks,
    Deadbeat

  8. Deadbeat said on November 11th, 2007 at 9:55pm #

    I think it’s pretty obvious why he didn’t; those policies aren’t supported by the majority of people. They have to be disguised in the rhetoric of “Morning in America,” get government off our back, etc.
    I don’t deny Reagan played the race card in his campaign. I simply disagree that race was the only, or indeed the main, reason for his victory.

    Hannah,

    White working class voters believed they were included in “Morning in America” and “get government off our backs” rhetoric. However “Government” to white voters was coded rhetoric meaning “BLACK Welfare Queens” was causing the “Democrats” to “tax and spend” real “hard” working white folks (good people) to death. Working class whites translated “affirmative action” to mean government intervention for BLACKS at the expense of white privilege while white women distance themselves as key beneficiaries of affirmative action.

    White working class voters saw “Morning in America” as “Mourning in America” as these Reagan Democrats associated their own false sense of powerlessness to U.S powerlessness from the Iranian Revolution and the Hostage Crisis.

    The white working class somehow believed government spending was not favoring them or they didn’t see HOW they (as whites) really benefited from government spending and didn’t mine voting for Reagan and his rollback polices. White working class voters saw themselves as part of “Reagan Country”.

    As I stated in my response, Reagan conceal his true class agenda using coded racial rhetoric — “Morning in America”, “All those people on welfare”, “Get government (people on welfare; people on social programs) off our backs” and most especially by inaugurating his campaign in Philadelphia, MS where civil rights workers were assassinated.

    What you are missing by lowering the importance of race is the reason WHY it has taken this long for the ruling class to make a frontal assault on Social Security. The ruling class had to soften the populous by attacking the poor and most especially people of color first — by attacking social and urban programs. This is a key reason why there is NO national health care system in the U.S. — “Hard working; good working (white) Americans don’t need government assistance”.

    Therefore without any analysis of racism you miss a key factor in understanding why the U.S. has persisted with 30 years of Reaganism and why white working class voters still support candidates whose policies clearly work against their interest.