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Griftopia by Matt Taibbi

* I highly recommend it. It’s worth the reading.

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EXCERPT from Griftopia by Matt Taibbi, pages 49-51; Spiegel & Grau 2010:

“In 1981 Reagan appointed Greenspan to head the National commission on Social Security Reform, which had been created to deal with an alleged short-term funding crisis that would leave the Old-Age and Survivors Insurance Trust Fund bankrupt by 1983. It goes without saying that any political decision one makes with regard to Social Security is hazardous; cutting benefits is a shortcut to electoral death, and the alternative, raising taxes, isn’t so palatable either.

Greenspan’s solution was to recommend hikes in the Social Security tax, which of course is not considered a real ‘tax’ (Reagan would hilariously later describe such hikes as “revenue enhancements”) because the taxpayer theoretically gets that money back later on in benefits. The thinking here was that in the early eighties, with so many baby boomers now in their prime earning years, the Reagan administration would hike payments to build up a surplus that could in twenty to thirty years be used to pay out benefits when those same baby boomers reached retirement age. The administration accepted those proposals, and the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent by 1990.

Two things about this. One, Social Security taxes are very regressive, among other things because they only apply to wage income (if you’re a hedge fund manager or a Wall Street investor and you make all your money in carried interest or capital gains, you don’t pay) and they are also capped, at this writing at around $106,000, meaning that wages above a certain level are not taxed at all. That means that a married couple earning $100,000 total will pay roughly the same amount of Social security taxes that Lloyd Blankfein or Bill Gates will (if not more, depending on how the latter two structure their compensation). So if you ignore the notion that Social Security taxes come back as benefits later on, and just think of them as a revenue source for the government, it’s a way for the state to take money from working-and middle-class taxpayers at a highly disproportional rate.

Second, Greenspan’s plan to build up a sort of Social Security war chest for use in paying out benefits to retirees twenty years down the road was based on a fallacy. When you pay money in Social Security, it doesn’t go into a locked box that is separate from the rest of the budget and can’t be used for other government spending. After the Greenspan reforms, the Social Security administration bought T-bills with that money, essentially lending the cash back to the government for use in other appropriations. So if, let’s say, your president wanted an extra few billion dollars or so of short-term spending money, he could just reach into the budget and take all that Social Security money, leaving whoever would be president two decades later holding not cash to pay out Social Security benefits, but government notes or bonds, i.e., IOUs.

And that’s exactly what happened. The recommendations ushered in after Greenspan’s commission effectively resulted in $1.69 Trillion in new, regressive taxes over the next twenty years or so.

But instead of keeping their hands off that money and preserving it for Social Security payments, Reagan, Bush I, Clinton, and Bush II spent it—all of it—inspiring the so-called Social Security crisis of George W. Bush’s presidency, in which it was announced suddenly that Social Security, far from  having a surplus, was actually steaming toward bankruptcy. That bad news was released to the public by then-Treasury secretary Paul O’Neill, who let it slip that the Social Security fund had no assets at all, and instead just had pieces of paper in its account.

‘I come to you as managing trustee of Social Security,’ O’Neill said. ‘Today we have no assets in the trust fund. We have the good faith and credit of the United States government that benefits will flow.’

In other words, Greenspan and Reagan had conspired to hike Social Security payments, justifying it with the promise of building up a Social Security nest egg for subsequent decades, then used up that nest egg on current government spending.

Now, it was bad enough that Greenspan, who as a Randian was supposedly against all use of government ‘force,’ would propose such a big tax hike. But what made his role especially villainous was that when George W. Bush decided to start sounding alarm bells about the future of Social Security, it was not other than Alan Greenspan who came out and argued that maybe it as time to cut social Security benefits. This is from the Washington Post story in February 2004:

Greenspan offered several ways to curtail federal spending growth, including reducing Social Security and Medicare benefits. The Fed chairman again recommended raising the age at which retirees become eligible, to keep pace with the population’s rising longevity. And he reminded lawmakers that they could link cost-of-living increases in benefits levels to a measure of inflation other than the consumer price index, a widely followed measure that some economists believe overstates the rise in overall prices. A measure that showed less inflation would cause benefit levels to rise more slowly.

To recap: Greenspan hikes Social Security taxes by a trillion and a half dollars or so, four presidents spend all that money on other shit (including, in George W. Bush’s case, a massive tax cut for the wealthy), and then, when it comes time to start paying out those promised benefits, Greenspan announces that it can’t be afforded, the money isn’t there, benefits can’t be paid out.

It was a shell game—money comes in the front door as payroll taxes and goes right out the back door as deficit spending, with only new payroll taxes over the years keeping the bubble from popping, continuing the illusion that the money had never left. Senator Daniel Patrick Moynihan, way back in 1983, had called this ‘thievery,’ but as the scam played out over the decades it earned a more specific title. ‘A classic Ponzi scheme’ is how one reporter who covered Greenspan put it.”

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