The Rich Are Behind Trust Fund Myth

One can reliably conclude that a political policy is failing when the stage business used to promote it gets more elaborate.

Thus, the bit of cabaret that President Bush engaged in this week at the Bureau of Public Debt in Parkersburg, W.Va., may be the surest sign yet that his campaign to dismantle Social Security is in trouble.

Bush’s subject du jour was the Social Security trust fund, which currently holds roughly $1.7 trillion in U.S. government bonds. Beginning in the 2020s, this fund (which will be worth more than $6 trillion by then) is supposed to be liquidated to help pay retirement benefits for the baby boom generation. The process will take a couple of decades. At the end of that period, the fund will probably be exhausted, but most of the baby boomers will have moved past retirement anyway to, um, celestial pursuits.

Bush’s purpose in Parkersburg was to portray this mechanism, which was painstakingly designed by a 1983 reform commission headed by Alan Greenspan, the current chairman of the Federal Reserve Board, as a fraud. The trust fund is basically fictional, he suggested; it’s just a bookkeeping device that conceals Social Security’s true fiscal crisis. By suggesting that Social Security has less money on hand than it seems to, he’s hoping to win support for his highly unpopular plan to privatize the system.

Accordingly, he staged a photo-op pilgrimage to the four-drawer cabinet in the Parkersburg facility in which the trust fund’s bond certificates are filed and briefly riffled through the pages. Then, smirking inanely for an audience of handpicked supporters, he ridiculed the idea that “the retirement security for future generations is sitting in a filing cabinet.”

“There is no ‘trust fund,’ ” he added, “just IOUs.”

Bush’s performance came straight from the right-wing playbook for the attack on Social Security. Its essence is that because the trust fund assets are merely bonds owed by the U.S. government to itself, they don’t exist in any normal financial sense. When the time comes to redeem the bonds to pay benefits, the argument goes, the only way to come up with the money would be to raise taxes sky-high, which would destroy the economy. No one wants to do that, so it’s best to pretend that the bonds have no value.

Plenty of otherwise thoughtful people have been taken in by this reasoning, as well as by the risible image of trillions of dollars of assets reduced to a few sheets of paper in a file drawer. (It has never been clear to me why the file cabinet should elicit such disdain. In what form do people expect to find the trust fund -- gold bars piled in a corner of Ft. Knox, like the ingots James Bond saved from destruction in “Goldfinger”? I suspect that the brokerage statements, oil leases and government securities that represent the Bush dynasty’s wealth are stored in file cabinets very much like this one.)

What’s really insidious about Bush’s ridicule of the trust fund is that it skirts a couple of crucial points -- where the money in the fund came from in the first place, and how it has been spent over the last 20 years. The truth is that it has come from the paychecks of average American workers, and it has been spent to subsidize the wealthy. All the talk that the country won’t be able to redeem the bonds in the 2020s, and therefore that Social Security benefits must be cut or privatized, really boils down to a refusal by the rich to repay decades of loans from the middle and lower classes.

To see how this has worked, one must understand that since 1983, when Congress last raised the Social Security payroll tax rate, the system has been taking in more money each year than it spends on benefits. The Social Security trustees have invested the surplus the only way they’re permitted by law -- in U.S. government bonds. In effect, they have lent the money to the federal government. Four successive presidential administrations (Reagan, Bush I, Clinton and Bush II) have used this windfall to keep a lid on income taxes without having to cut the federal budget.

But because the payroll tax is paid mostly by the middle class and poor, and the income tax disproportionately by the rich, the result has been a redistribution of wealth from the bottom up. Roughly three-quarters of all workers pay more in Social Security tax than income tax; because all wages over $90,000 are exempt from the payroll tax, it’s the wealthy who get the break.

On the other hand, if income taxes are raised to pay off the trust fund bonds after 2020, it’s the wealthy who will be hit hardest. They don’t want to pay, which is why their mouthpieces in the administration are whining that the trust fund is a myth and that the country can’t afford to redeem the bonds.

The pretense that the interests of wealthy taxpayers coincide with those of the entire community has become alarmingly popular among Republican officeholders. It’s the basis of Gov. Arnold Schwarzenegger’s argument that the state can’t afford to raise income taxes, but somehow can afford to welsh on his debt to the public school system (which mostly serves the non-wealthy). There are encouraging signs that Californians have begun to get wise to the governor’s scam; one can only hope that the rest of the country soon gets wise to the president’s.

You can reach Michael Hiltzik at golden.state@latimes .com and read his previous columns at latimes.com /hiltzik.