The Scum at the Top

Commentary on the Rats in Washington

Lots of Gain and No Pain!

By Robert Samuelson
Newsweek
© February 21, 2005
Page 41

Americans prefer to be deceived rather than face the hard choices of doing something about budget deficits and funding Social Security

You've never heard of Flemming v. Nestor, but it's a 1960 Supreme Court decision that demolishes the Bush administration's case for borrowing vast amounts to pay for its proposed "personal" Social Security accounts. The White House has crafted a clever bit of intellectual camouflage to do what's politically convenient: create a new government benefit the personal accounts—at no obvious cost. True, borrowing is a cost, but it's largely hidden from the public. It's not as conspicuous as a tax. What we have here is an exercise in mass deception that, in a weird way, is encouraged by a public that prefers to be deceived rather than face the difficult choices posed by Social Security or the government's budget.

If personal accounts are worth having (my view—they're not), then they're worth paying for through taxes or cuts in other government spending. Perish the thought. The administration created a massive Medicare drug benefit (estimated 2006-2015 cost: $795 billion) without new taxes, and why shouldn't it do the same for personal accounts? The White House estimates the needed borrowing at $754 billion in the next decade. Democrats on the House budget committee put the first full decade of borrowing (which would start in 2009) at $1.4 trillion. Regardless of amount, the administration's justification is the same: the borrowing simply replaces one debt (future Social Security payments) with another (borrowing now for personal accounts). As Joshua Bolten, head of the Office of Management and Budget, testified last week: "The transition financing [of personal accounts] does not represent new debt. These are obligations that the government already owes in the form of future [Social Security] benefits." Sounds reasonable. It isn't.

A bond is a legal debt; Social Security is not. When the government sells a bond—that is, borrows—it assumes a legal obligation to pay the lender interest and to repay the principal. If the government defaulted, creditors would go to court to demand repayment. Social Security does not involve this kind of debt; Congress can raise or lower benefits at any time. This is both common sense and the law—Flemming v. Nestor.

Ephram Nestor had immigrated to the United States from Bulgaria in 1913. In 1956 he was deported because he'd been a Communist Party member for six years (1933-1939) and was also stripped of his Social Security benefits—both acts following congressional law passed in the prevailing anti-communist climate. Nestor had paid payroll taxes for 19 years; he sued to get his Social Security. The court rejected his claim. Unless Congress was utterly arbitrary, the court said, it could alter Social Security as it pleased. Congress needed to have "flexibility" to adjust Social Security to "ever-changing conditions."

It may shock most Americans to know that Congress could legally cut or eliminate their Social Security benefits tomorrow. But that's also the White House position. Dig deep into its budget documents, and here's what you find on page 203 of "Analytical Perspectives": "Future Social Security ... benefits may be considered as promises or responsibilities of the Federal Government, but these benefits are not a liability [debt] in the legal or accounting sense. The Government has unilaterally decreased as well as increased these benefits in the past, and future reforms could alter them again ... There is no bright line dividing Social Security ... from other programs that promise benefits to people." Well, this flatly contradicts the administration's logic for borrowing. If it can borrow tons of money for personal accounts, it can borrow tons for future food stamps, Medicaid or Pell Grants, among others.

In a sense, this has been happening, because the budget has run deficits in all but five years since 1960. The new Bush budget envisions deficits forever. Yet there is little public appetite for anything else. Bush's budget proposes cutting or eliminating 150 programs with savings of $20 billion in 2006. The response: the sky is falling. broad cuts, headlined The New York Times. Not really. The proposed cuts amount to eight tenths of 1 percent of proposed spending of $2.57 trillion. The press, among others, criticizes deficits—and also spending cuts that might trim deficits.

In an expanding economy (unemployment: 5.2 percent), Bush should have proposed a balanced budget, and his projected deficits are understated because they exclude some Iraq war costs and borrowing for Social Security. Still, closing even the unrealistic deficits would require unpopular measures. The projected deficit for 2009 is $233 billion. A 10 percent income- tax surcharge, raising about $125 billion in 2009, and repeal of the Medicare drug benefit, saving $66 billion, would cover most of the deficit (lower interest payments would erase most of the remainder). Does anyone hear a groundswell for these?

Americans dislike deficits but dislike them less than the alternatives—higher taxes or lower spending. There's a quiet clamor for hypocrisy and deception; and pragmatic politicians respond with massive borrowing schemes that seem to promise something for nothing. Please, spare us the truth.

© 2005 Newsweek, Inc.

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