Tuesday, February 08, 2005

Robin Hood in reverse

I haven't paid much attention to the current debate on Social Security in the US because I thought I'd seen it all before. Social Security, and the (then) Bush campaigns' mendacity over explaining its plans was a major theme in Paul Krugman's The Great Unravelling, which I read recently. But for all his criticisms of the Bushies' dishonest accounting and dishonest salesmanship, Krugman never in his worst nightmares imagined that they'd do what they're planning to do now.

American Social Security is what we in New Zealand call "superannuation" or "the pension"; it's what (hopefully) keeps poor Americans from starving in their old age. It's funded on a "pay as you go" basis through a dedicated payroll tax, a flat-tax which cuts out at a medium-high level of income (by US standards), so that basically the poor and middle classes bear most of the burden of paying for the scheme.

This obviously suffers from the same problem as New Zealand's superannuation scheme - the demographic bulge caused by the baby boomer's retiring - and the Americans used the same solution: saving to cover the gap. Twenty years ago they hiked the rate of the payroll tax - which falls mostly on the poor and middle classes, remember - in order to build up a "trust fund" to pay the bills in the future. This trust fund invested its cash in the safest investment money could buy: US government bonds.

Enter Bush. Bush wants to get the government out of the social security game by privatising it - otherwise known as the "let the elderly starve" solution. His problem - aside from covering existing obligations to current retirees, which he tries to hide with fuzzy maths - is selling it. Social Security is a genuinely popular program which makes people feel relatively secure about their retirement; radical reform carries a significant political cost. So, he relies on the oldest trick in the book: invent a crisis. This started out as making a lot of noise about how Social Security would no longer be able to meet its present obligations when the trust fund ran out... in about 2050 or so. Unfortunately, this depends on some rather pessimistic economic assumptions which make things seem a lot worse than they actually are. As Kevin Drum has pointed out, Social Security's "bankruptcy date" has moved into the future by more than a year for every year that has passed. So, enter phase II: suddenly, the "crisis point: is 2018 or so, when payroll taxes will no longer be able to cover outgoings, and the system will have to start drawing on its savings. But the only way this can be a "crisis" is if the trust fund can't be tapped - in other words, if the US government decides to stiff one of its largest investors and refuse to pay out on those bonds.

What would the Bush Administration gain from this (apart from a global economic meltdown)? It would be able to make its tax cuts permanant. Those tax cuts of course flow almost entirely to the top one or two percent of Americans - and will now be funded by stealing money saved for retirement by the bottom eighty percent. In other words, it's Robin Hood in reverse: robbing from the poor to give to the rich.

There's a warning here for New Zealand. Like the US, we are prepaying the expected costs of a demographic bulge in retirement. But while the Cullen Fund isn't putting all its eggs in NZ government bonds, it is still going to be a large pot of money which will be a perpetual temptation to politicians. And it's not inconceivable that at some stage in the future, some crusading market fundamentalist will decide to fund another round of tax cuts for the rich by looting the retirement savings of ordinary, working New Zealanders.

We must make sure that that never happens.