Tale of Three Trust Funds

A guest article this week by Ward Carson:
I’ve always appreciated the value of a trust fund.  My friend Jim has one.  He deserves it I suppose; his father was a millionaire.  He’s always lived free and easy.   His fund has treated him well.

I became fascinated recently with a second fund—the Sovereign Wealth Fund of the State of Norway.  I’ve read that it’s now the largest in the world—worth about one trillion US Dollars, which, for the 5 million Norwegians, figures to be about $200,000 per citizen.  

So where did Norway get this fund?  They discovered oil in their North Sea and, through a well-organized effort in the 1970s and 80s, built a national infrastructure, including their own global company (Statoil A/S), and quickly became a major player in the oil sector.  By the 1990s Norway had more oil-based income than they could reasonably use and, with an eye on the future, their government created an investment service to build their trust fund to deal with the excess.  A smart move I’d say—reportedly, they now have more sovereign revenue from their investments than from their oil resources.

A wonderful story I thought.  One that made me think more about a third fund—our Social Security Trust Fund—that was started about the same time.  Where did it come from?  Well, Ronald Reagan had just become President in 1981 and got right into some of his revolutionary ideas, which included massive tax cuts and a new, “trickle-down”, economic theory.  Over his tenure in office, his administration managed to lower the top, progressive, marginal tax rates—that had been between 70% and 90% on the wealthiest income earners since the early 1940s—to a very low 28%.  The promise to the middle and lower earners was that such a drastic move would encourage general economic activity and provide a trickle-down of benefits through other channels (into good jobs, cheap goods, that sort of thing).  Seemingly good ideas perhaps but the cuts immediately left a large revenue problem and the threat of huge budget deficits.

By 1982, with the initial tax cuts in place, a solution was desperately needed to cover the deficits.  That’s when America first met Alan Greenspan and his proposal to raise the Social Security tax rates and spend that revenue to cover the deficit.  Granted, a quick and simple reading of that proposal might leave one to conclude that he was suggesting that the effect of revenue lost by tax cuts on the wealthy be covered by increased taxes on the lower and middle income earners.  And that would be a correct reading however Greenspan had more to say and the Social Security Trust Fund was part of his message—a justification that the wealthy were anxious to hear.

Greenspan’s full story, in 1982, went something like this:  The Social Security Benefits for retirees depend upon the revenue raised by taxing the payroll of current workers (…as it had for nearly 50 years).  There were an unusually large number of Baby Boomers (born after WW II) working just then, so there was no lack of Social Security taxes at the time.  However, because this large group would introduce a larger benefit burden later (starting around about 2015), the idea was to raise the rates on them in 1982 and save the additional revenue for the future in a Social Security Trust Fund.  Fair enough up to that point, you might say.  It was only later, after Congress accepted his proposal and the middle class turned their attention back to their day-to-day work, that Greenspan added the key feature that really sold the package to Reagan and his wealthy beneficiaries.  It went like this: “Oh, and since taxes are taxes, we’ll spend the excess SS wage taxes as we would any other tax—to avoid the deficit of course! —And, since we won’t need the money to cover additional SS Benefits until after 2015, we’ll merely keep track of the Fund’s value on paper—a promissory note backed up by the full faith and credit of the US Government!”

Well, 2015 has come and gone, the use of wage SS taxes to relieve the income tax cuts for the wealthy still goes on but many of the Baby Boomers are now retiring and in need of their benefits.  The accounting shows that the Trust Fund—apparently worth nearly $3 trillion on paper—will cover them, but some politicians would have us question that promissory note.  Their faith is apparently wavering amid concerns for claims of poor credit and they claim the SS system was a poor idea to begin with (even though it has worked well for over 80 years!).

So, that’s where my tale stands today.  Jim is retired and still living well and the Norwegians are prepared to take care of their old folks.  But, here in American, we’re being asked to accept that 30 years worth of excessive SS taxes were spent—needed to cover the deficits caused by 30 years of low tax rates on the wealthy continuing to this day:  part of the massive transfer of wealth talked about by Bernie Sanders.   I agree with him; the wealthy