Lew on Social Security – Dump It!

So we have a new Treasury Secretary. Jack Lew got by a Senate vote last night. I wish Mr. Lew well, he will need all the help he can get. He’s taking charge at exactly the wrong right time. The country is about to jump off the sequester cliff and in less than a month there has to be either an approved budget, or a Continuing Resolution to keep the government running. We shall see if Mr. Lew is up to the job very soon.

There were many questions about Mr. Lew. His history (and huge bucks) from NYU should have been a question, but no one asked about that. And there was his time with Citi and Bob Rubin before the SHTF. Oh well, who cares about things in the past?

There is one aspect of JL’s past that did not come up at all. I’m surprised that it didn’t as it may prove to be a big deal. Way-way back in 1978, when JL was at Harvard, he wrote a paper about taxes and Social Security for his senior thesis. I found the details of JL’s efforts 25 years ago in an article from Charles Johnson at the Blaze (Link). The paper had a catch title:

“The Ideology and Politics of Old Age Insurance in the United States.”

The young JL penned some things back in his Harvard days that would turn the blood cold of most SS lovers today. I suspect that some of his words would also tick off a few conservatives. If JL still believed what he wrote years ago, he would never have been considered as Obama’s T-Sec. He certainly would not have been confirmed by the Senate.

JL was a big supporter of Social Security when he was a kid. He thought that retirement checks were a birthright:

“Old age and Medicare benefits are guaranteed as a matter of right even though many recipients draw more benefits than they have paid in contributions.”

This type of thinking does not sit well today. The government will have to cut the legs off the military, layoff air traffic controllers and meat inspectors (and all that other horrible stuff that is about to happen) yet JL thinks that the rest of the country should go to hell in a handbag so that seniors can get retirement checks that they did not pay for. It gets worse:

Congress was reluctant to abandon the principle of self-supporting old age insurance, because of a misguided focus on “financial solvency.”

Oh boy! Talk like that today, and you get shown the door. One has to wonder if JL is still of this mind. Does he still believe that a focus on “fiscal solvency” is a misguided policy? He better have changed his views – If he hasn’t, then the USA is going to be a single A in four years.

In 1978 SS was headed into a wall. The problem was “fixed” in 1983 when Alan Greenspan pushed Congress for big increases in payroll taxes to shore up SS’s finances. JL was in favor of a different approach than Greenspan. He recognized the major flaw in SS – payroll taxes are very regressive.

“Congress has denied progressive taxes for insurance benefits”

“The logic of this course is difficult to understand but appears to represent a continuation of the deeply rooted belief in the tradition of self-support and individualism which for so long blocked passage of social insurance.”

JL is stepping on a cornerstone of SS. This program was supposed to be separate and apart from the government. The SS defenders are still crying, “SS does not add to the deficit – Leave it alone”. But JL was spot on with his observation. SS payroll taxes are very regressive. For the progressives who support SS, the inconsistency of regressive taxes has always been an issue. One can’t be a progressive, and also believe in regressive taxation.

In his paper, JL argued for “experimentation” to address the fundamental flaw of SS. He favored eliminating the regressive payroll tax and replacing the revenue with direct contributions from the Treasury. As income taxes are progressive; this resolves the regressive problem.

JL was right about the regressive aspect of SS. But what he did not take into consideration is the fact that if general income taxes are used to fund SS checks, then those checks would be an on budget expense. SS would become Paygo. It would take only a few years before the public turned on SS if this were to happen. The fact that SS can today claim, “We’re off budget” would be lost if income taxes replaced payroll taxes. (Progressives supported the 2% increase in payroll taxes in 2013 in an effort maintain the “off budget” meme. Totally inconsistent logic.)

Jump to today. SS (especially the DI fund) is in need of a fix. Either benefits get cut, or SS revenues go up (some combo of the two are coming). Obama is not going to support more regressive payroll taxes to bailout SS. But Obama does not want to be the Prez that cuts SS benefits either. The only other option would be for general tax revenues to be diverted to SS. This is exactly what happened the last three years with the “temporary” 2% reduction in payroll taxes. And this is exactly what JL advocated in his thesis. Back to 1978, and the youthful JL:

Social Security is “only a beginning” in an “embattled struggle for social insurance.”

Yikes! Sounds like Marx? He goes on:

Meeting that obligation would require the government to guarantee retirees a fixed amount of money to live on.

That sounds “Commie” to me. JL agrees:

The specter of Communism, made that kind of solution (progressive taxation for SS) unlikely.

So as a kid, JL was writing like a Pinko, what was he thinking?

“Communism at home and abroad became the target of exaggerated fears”

This was 1978, the Cold War was on. Vietnam was over, but still a very raw wound. Not at all unusual for Harvard types to be leaning down the left fork of the road. JL concluded that the fear of Communism would not allow congress to achieve his dream:

Government had an obligation to guarantee, or share the cost of guaranteeing, a minimum income for any American.

How would you describe that philosophy? “Communism” does come to mind….

JL has been around the block a few times since he wrote his paper. But I wonder how much he has actually changed. If he does succeed in a plan to supplement SS with general tax dollars he will be the guy who goes down in history as having destroyed it. If SS gets socialized, it’s dead in less than a decade. I hope JL pushes to where he wanted to go as a boy. To save SS, it has to be broken apart and put back together. JL’s thinking from 1978 would achieve that.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

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