SHELTER ISLAND, N.Y. -- Buried under layers of argument, analysis and sophistry, the real issue in the Social Security fight has become invisible. That issue is the nature of the obligation. Is Social Security a firm contract with its beneficiaries, as a government bond is a contract with its holders? Or is it simply another government program that can be modified or even abandoned at any time by Congress and the president? Through the years of the big deficits—the early Bill Clinton years as well as the years of Ronald Reagan and the first George Bush—presidents insisted that all the revenues from Social Security taxes were available to be spent for other purposes, just as the revenues from other taxes were. Borrowing from the so-called Social Security trust fund was a routine way to pay the government's bills.
Mr. Clinton's first budget justified "consolidating" the surplus generated by Social Security taxes into the general budget on these grounds: "The federal budget meaning of the term 'trust' differs significantly from its private sector meaning. In the private sector, the beneficiary owns the trust's assets. . . . In contrast, the federal government owns the assets of most federal trust funds, and it can raise or lower future trust fund collections and payments by enacting changes to existing law."
But history shows clearly that absent serious abuse (and sometimes despite it), pension obligations, once assumed by a nation, are for all practical purposes irrevocable. People who have come to expect government support in old age as a right—especially if they have long paid taxes dedicated to a pension program—will so resist revocation or even significant alteration of this support that change is virtually impossible. This practical truth is so well accepted internationally that the World Bank does studies of the "implicit pension deficit" in every country, adding these obligations to the published national debt figures to calculate each government's real balance sheet.
The contract between the United States and its Social Security recipients is so strong that at times in the past 20 years it has been better than the contract with holders of Treasury bonds: Social Security payments, indexed to inflation, have not lost real value, while bonds have.
What matters about the trust fund is that its existence expresses the fact that Social Security is a liability of the government. The assets in the trust fund are Treasury bonds. And bonds, of course, are claims on general revenues, including money from taxes on capital gains and corporate income as well as the payroll tax. When Treasury Secretary Paul O'Neill says the bonds in the Social Security trust fund are not "real economic assets," he is denying that the full faith and credit of the United States stands behind the financing of Social Security benefits—at least as long as the Social Security system holds bonds. This rhetoric is dangerous because it could undermine confidence in the Treasury's bonds.
As a matter of economics, the bonds in the trust fund are indeed irrelevant. When revenues from Social Security taxes no longer cover the benefits being paid out—which will happen somewhere around 2015—the government will presumably sell bonds to make up the difference. The effect on the national economy will be the same whether the bonds are drawn from a stash at the Social Security Administration or printed fresh.
The premise of a permanent obligation to Social Security does not deny the argument that the trust fund should be invested in assets with higher yields than government bonds. Seeking higher yields from savings is politically neutral. Alan Greenspan, chairman of the Federal Reserve, has worried in public that the collective investment of Social Security retirement funds in the markets would give the government too much power. Yet the Fed's own pension system, for its employees, has its assets in corporate securities managed by money managers who also manage private pension funds. If the Fed, with its power over the nation's finances, can control its conflicts of interest in making investments, surely the Social Security administration, which is much less secretive, could do the same.
Turning Social Security into a matter of individual private accounts, by contrast, would tear up the contract that Americans who paid Social Security taxes thought they had with their government. A government that promised justice for all would suddenly leave many of its older people at the mercy of the state of the market on the day they retire—or of the prevailing interest rate on the day they receive their annuities. No change in American society in the last half-century has been so dramatic as the reduction of the proportion of the elderly who are poor, and most of this change is the benign shadow of Social Security. That's a lot to put at risk.
With his gift for identifying and exploiting gut issues, Bill Clinton demanded that the federal government "save Social Security first." George W. Bush decided that tax cuts were a higher priority. Now his administration must deny in every way and in every forum that the already codified expectations of Social Security recipients are an inescapable charge on the general revenue of the government.
If Social Security is an obligation that binds the government, and a government that is cutting taxes seeks to evade that obligation by reducing the benefits, it will appear that old people of low or moderate income are being made to work a year longer before retirement, or to accept a smaller pension, simply to lift from the shoulders of the wealthy the burden of the estate tax. And that would be a perilous platform on which to stand for re-election.