Responding to Klein: Don’t Cross the Revenue Streams!

The Center on Budget Policy and Priorities has released a chart that is causing a stir among those who want to raise taxes on the top 2% (for a variety of reasons, to pay for an expanding list of programs). In fact, so many have seized on this chart that we have to take exception and respond. The chart appears to show that the Social Security shortfall over the next 75 years could be solved by increasing tax rates on the top 2% of income earners (the proposed expiration of the Bush tax cuts). Whether or not the math works (which is a separate debate), the chart in uninformed hands is at best misleading and at worst dangerous. In short, the chart fails to account for two major things: first, the Social Security trust fund is completely separate from the general revenue stream, and income tax increases shouldn’t be used AT ALL to pay for expanding Social Security benefits; second, the potential tax increase has already been “used” by Democrats to pay for a myriad of programs in future budget projections, including in our opinion the most important use – reducing the deficit. The money can’t be used to pay for several things at once- you can’t have it ALL ways.

When Social Security was designed it was to create a program that would protect against the dangers of modern American life; old age, poverty, unemployment and disability, paid for with a new (and controversial) payroll tax. Shortly after the program was created it was clear that benefits would not be paid out in the same magnitude in which taxes were collected – not a pay-as-you-go year by year scenario. In order to account for this problem and to ensure that the left-over reserves of the fund – what was collected each year but not paid out – were kept in reserve for the program, the trust fund was created to sequester these reserves to ensure the sustainability of future payments.

Over the years (notably in 1983), adjustments have been made to the benefit calculation and the payroll tax rate in order to keep future benefit projections in line with revenue stream projections –essentially to keep the fund working and rotating correctly. Keeping the trust fund separate enables exactly these calculations and revisions to occur within the social security program. If we’re not collecting enough or paying out too much, then we fix the program within itself, we don’t dip into another program to pay for it.

In fact, the Social Security trust fund is treated very differently from the bulk of the federal budget. In wonky budget-nerd terms, it is “off-budget” meaning the fund, its balances, and its revenues aren’t taken into account with the rest of the budget picture. Future deficit calculations for the federal budget don’t include Social Security shortfalls or taxes at all. It is, and has almost always been, it’s own entity.

As we pointed out here the link between the payroll taxes and the trust fund has been very important in providing a specific link between the taxes and the benefits they are designed to fund. In addition, the trust fund prevents the program from having to compete for resources with other federal programs.

So this brings us to the new suggestion being made by folks like Ezra Klein, that we should just use income tax increases to pay for the projected social security shortfall. We can almost hear the line from Ghostbusters ringing in our ears: “Don’t cross the streams!” Diverting a portion of income taxes collected to the social security program crosses all kinds of budgetary lines, but mostly it’s a really bad idea.

The fundamental principle underlying the Trust Fund is that the program’s spending must be generated by its own funding. Social Security can’t spend more than it collects. Delinking this fundamental idea would preclude the kinds of necessary reforms we saw in 1983 to force an unsustainable program to make changes. Opening the flood gates to the general treasury is exactly the non-solution we continue to see from a Congress and an Administration unwilling to make hard choices with limited fiscal resources.

As Megan McArdle pointed out this morning, the revenues collected from the tax increase have already been “used” to pay for other future programs in the Administration’s budget. While revenues aren’t earmarked for programs dollar for dollar, the Administration’s spending plan already assumes the inclusion of the tax increase on the top 2% and still we have deficit projections as far as the eye can see.

This has been a recurring theme among Democrats, using the save savings over and over again to pay for several programs. In the most recent and egregious case (as we’ve discussed here and here), the new health care law uses some extreme double counting, claiming that the same revenue stream will both increase the solvency of the Medicare Trust Fund and be used to reduce the deficit. Very simply, this can’t be true: you can’t spend the same money on future benefits and use it to pay the deficit down. In light of our current fiscal crisis, this double counting practice has to end.

McArdle hit the nail on the head:

“While it is perhaps true that you could "pay for" the Social Security shortfall by rescinding the Bush tax cuts on the rich, that would leave a gaping budget deficit that would then have to be paid for in some other way…In the face of the sizeable deficits we are projecting into the foreseeable future even after all the Bush tax cuts expire (not just the ones on the wealthy), the "point" made by this chart seems kind of actively misleading.”