The Looting of Social Security: Pre-taxing the Baby Boomers

by

Allen W. Smith, Ph.D.

On April 20, 1983, one of the most significant developments in the history of Social Security legislation took place with great fanfare.  It was the signing ceremony for the Social Security Amendments of 1983, which President Ronald Reagan called landmark legislation. This legislation laid the foundation for what would become one of the greatest frauds ever perpetrated against the American people by their government.  Yet, today, in the midst of one of the most heated national debates on Social Security in the history of the program, almost nobody knows about the 1983 legislation.  The news media carries article after article about the status of Social Security without ever mentioning that the “baby-boomer problem” was supposed to have been “fixed” by that 1983 legislation. During the debate for the 1983 legislation, the baby boomers were vilified as the ones who were threatening the future solvency of Social Security.  They were also hit with a big payroll tax hike that required them to prepay the cost of their own retirement benefits, so there would not be a solvency problem when they actually retired.  But the 1983 legislation, which hit the boomers so hard, is now forgotten, and the baby boomers are once again popular scapegoats.

Below are remarks made by President Ronald Reagan just before he signed the legislation into law. 

“It's especially fitting that so many of us from so many different backgrounds--young and old, the working and the retired, Democrat and Republican--should come together for the signing of this landmark legislation.

“This bill demonstrates for all time our nation's ironclad commitment to social security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire… .

…Political leaders of both parties set aside their passions and joined in that search. The result of these labors in the Commission and the Congress are now before us, ready to be signed into law, a monument to the spirit of compassion and commitment that unites us as a people.

Today, all of us can look each other square in the eye and say, "We kept our promises." We promised that we would protect the financial integrity of social security. We have. We promised that we would protect beneficiaries against any loss in current benefits. We have. And we promised to attend to the needs of those still working, not only those Americans nearing retirement but young people just entering the labor force. And we've done that, too…

…So, today we see an issue that once divided and frightened so many people now uniting us. Our elderly need no longer fear that the checks they depend on will be stopped or reduced. These amendments protect them. Americans of middle age need no longer worry whether their career-long investment will pay off. These amendments guarantee it. And younger people can feel confident that social security will still be around when they need it to cushion their retirement.

These amendments reaffirm the commitment of our government to the performance and stability of social security.--President Ronald Reagan on signing the Social Security Amendments of 1983 on April 20, 1983

When the first surplus Social Security revenue showed up in 1985, it was deposited in the general fund and spent on general government operations, just like all other revenue.  However, non-marketable government IOUs were placed in the trust fund as an accounting device to show how much Social Security money had been spent.  Reagan set the precedent, which would be followed by the next four presidents, and their Congresses, Republicans and Democrats alike.  However, when President George H.W. Bush continued the looting of the trust fund, he faced strong opposition.  A group of Senators began to speak out against the looting, and they tried to end it. 

In 1990, Senator Daniel Patrick Moynihan of New York introduced legislation to repeal the 1983 payroll tax hike.  He was outraged that, instead of being saved and invested for the baby boomers, as was the intent of the law, the money was being used to finance other government programs.  Moynihan’s position was that, if the government could not keep its sticky fingers out of the Social Security cookie jar, he wanted the jar emptied so there would be no surplus revenue to loot.  Although Moynihan’s proposed legislation was supported by the conservative Heritage Foundation, the liberal Institute of Policy Studies, and the U. S, Chamber of Commerce, it did not stand a chance of passing because of the strong opposition of President Bush.  Bush was not about to give up his large, secret slush fund. The looting continued, unchanged, under Presidents Bill Clinton and George W. Bush.  President Obama was able to loot only the small surplus of 2009.  The many years of Social Security planned surpluses came to an end in 2009, and the perpetual annual deficits began in 2010. The United States government has reached that point where annual revenue from the payroll tax will be insufficient to pay full benefits.  This is when we were supposed to dig into the $2.6 trillion reserve that was supposed to be in the trust fund.  But every dime of that surplus has already been spent, and the only thing in the trust fund is non-marketable IOUs that can neither be sold nor used to pay benefits.  The great day of reckoning has finally come.  Either the government will have to take money from the general budget to supplement the inadequate payroll tax revenue, or it will have to cut benefits.  That is why so many politicians are today calling for cuts in Social Security benefits. 

             Copyright 2011 Allen W. Smith