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Fooled by the shell game

WHEN ALAN Greenspan told a congressional committee last week that Social Security benefits for baby boomers should be cut to help reduce the growing federal budget deficit, the third move in a game I call the Social Security Shell Game was played out.


The Social Security Shell Game has distracted voters while bringing about a significant shift in the tax burden from the rich to the middle class.

The first move in the shell game occurred more than 20 years ago. To avert a funding crisis in Social Security due to the impending retirement of the baby boom generation, a commission headed by Alan Greenspan in the early 1980s proposed major changes in Social Security, including increases in payroll tax rates.

These changes would generate revenues far in excess of monies needed to pay current benefits. The surplus would be used to pay down the federal debt so that future borrowing to provide Social Security to retired baby boomers would not strain the economy. Congress heeded the commission's recommendations and raised payroll taxes. Because payroll taxes are only paid on wage and not capital income and because most payroll taxes only apply to wage income below a limit ($87,000 in 2003), they fall more heavily on working people than on the rich.

Fast forward 20 years to the second move in this game. The Bush tax cuts reduced personal income taxes sharply and began a 10-year phase-out of the estate tax. Greenspan came out in favor of the tax cuts, despite protests from some quarters that the head of the Federal Reserve should not be weighing in on tax policy issues.

Who benefits from the reductions in the personal income tax contained in the 2001 and 2003 tax cuts? According to data from the Tax Policy Center, a joint initiative of the Brookings Institution and the Urban Institute, the reductions will be worth on average about 2.5 percent of income for all households in 2009 if the president gets his way and makes the tax cuts permanent.

The cuts, however, total 5.2 percent of income for households with adjusted gross income of $500,000 to $1 million and 6.2 percent of income for those households with adjusted gross income in excess of $1 million. How about the repeal of the estate tax? Fewer than one percent of estates pay any estate tax at all, and roughly two-thirds of the tax is paid by the wealthiest one percent of the income distribution.

What does this have to do with Social Security? The Social Security surplus has helped drive down federal debt by $1.46 trillion between 1983 and 2003. For fiscal years 2005 through 2009, the Congressional Budget Office projects a surplus in the Social Security Trust Fund of just over $1 trillion and a deficit in the rest of the budget of $2.49 trillion. Not only will that $2.49 trillion deficit in the rest of the budget entirely consume the Social Security surplus anticipated over the next five years, it will wipe out the Social Security surplus built up over the previous 20 years to finance baby boom retirements.

Now we get to the third move in Social Security Shell Game. Rather than condemn the tax cuts that have entirely spent the surplus accumulated as a result of the commission he headed to save Social Security, Greenspan instead recommends cuts in Social Security and Medicare benefits to the baby boomers to help rein in the deficit.

This is breathtaking. Imagine if Congress had come forward in the 1980s with a proposal that recommended cutting Social Security benefits to future retirees while raising taxes on wage income. The monies collected would be used to provide a windfall gain to big estates by eliminating a tax that they had fully expected to have to pay and to cut taxes disproportionately on the income of the rich.

Hard to imagine such a policy, isn't it? But that's what the Social Security Shell Game is doing.

How do they get away with this, you ask? Simple. While you're distracted by the moving shells, the money gets snatched.

Gilbert E. Metcalf is chairman of the department of economics at Tufts University.

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