If you owed yourself $1,000 on which you were paying interest, and you ran into financial difficulties, would canceling this loan to yourself be the first thing you did?
Sounds like an idiotic question doesn’t it? Why would anyone borrow money from himself in the first place? Why would he pay interest on it? And why would he possibly hesitate for a second to cancel this nonsensical debt when need required?
This is thus the question we should be asking today about the Social Security Trust, which if canceled, would immediately put the U.S. economy on far firmer footing.
In its present configuration, the Social Security Trust was another brain-child of Alan Greenspan, which right there should tell you its inherent good sense. The idea, as presented, was to over-tax (yes, Over-tax) working Americans making less than upper middle class incomes to raise funds for a trust that was supposed to make up deficits in Social Security payments when Payroll Tax collections fell short. And to ensure that such money would be there when needed, all excess Social Security tax revenues collected were invested in US government bonds.
At first glance this appears to be just a self-funded, ultra-safe way to guarantee there would always be enough in hand to meet Social Security commitments. What it actually was during the decades when working Americans overpaid Social Security taxes to fill this Trust was a way for the government to overspend without appearing to do so, because what went into the Trust was long not counted as part of government deficits.
And what have we ended up with today by virtue of this scheme? A Trust whose money, and the interest on this money, that is being used to make up shortfalls in Payroll Tax collections, actually comes from the government’s own present tax collections and borrowing — a situation exactly like the one noted above, someone paying himself back for a loan with his own money, plus interest.
There’s now $2.6 trillion in this preposterous financial contraption, this Rube Goldberg economic construction, and it benefits no one in anyway whatsoever. It could be abolished tomorrow, Social Security could be made a pay-as-you-go system that it once was and should have remained, with shortfalls made up with very modest increases in the earned income subject to this tax in poor economic times, and gradual decreases in the earned income subject to this tax when times improve.
What would the benefits of making this bookkeeping change (and a bookkeeping change is all that it is) be? Before noting them, let me emphasize one important fact: All the money in this pile of government IOUs, All of it, unlike other federal government IOUs, comes from domestic sources, from American working people, so no foreign buyers of our government paper would lose a nickel in this change. Here, then, is what abolishing the Social Security Trust would accomplish:
1. The total indebtedness of the U.S. government would immediately decline by $2.6 trillion, leading to an instant upgrade from Double-A to Triple-A of our government credit rating, and guaranteeing the government would pay less than it would have to pay otherwise on all of its future borrowing.
2. The interest paid on the government bonds in the Trust, paid with present tax collection or borrowing, would no longer have to be paid, releasing hundreds of billions of dollars annually that could be used to increase Social Security benefits, reduce tax levels for all Americans, or spending on job-creating programs — take your choice.
3.There would be very modest and temporarily increases in upper middle class Payroll Taxes but… this change would bring into a being a mechanism that decreases these upper income tax bites when the economy improves and more is collected from a pay-as-you-go system.
This is not a left-wing idea. This is not a right-wing idea. I know it’s only common sense and this is America 2012. But might we not consider it anyway?
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