Former Treasury Secretary Timothy Geithner's memoir, "Stress Test," is being picked apart fairly intensively by the Washington and Wall Street press gangs, who are busily retailing the book's snarks and slights.
We're more interested in a nugget in which Geithner demonstrates that he didn't actually understand how Social Security works or its paramount importance to the way most Americans -- those who aren't rich bankers -- live. This is especially shocking because as Treasury secretary, Geithner served as an ex officio Social Security trustee.
Here's the passage from the book:
"I remember during one Roosevelt Room prep session before I appeared on the Sunday shows, I objected when Dan Pfeiffer [a senior advisor to the Obama White House] wanted me to say Social Security didn’t contribute to the deficit. It wasn’t a main driver of our future deficits, but it did contribute. Pfeiffer said the line was a 'dog whistle' to the left ... code to the Democratic base, signaling that we intended to protect Social Security."
Geithner's anecdote already has been seized upon by the usual enemies of Social Security on the right to suggest that he, the lone truth-teller in the administration, was warned off Social Security "reform" for political reasons. Here's Andrew Biggs of the American Enterprise Institute grousing that Pfeiffer's "'dog whistle' also signals to everyone else that you’re not committed enough to entitlement reform to give it to people straight." Over at Fox Business (go figure) they wrap Geithner's yarn into a sizable helping of comprehensive Social Security ignorance. Guess what: It fits right in.
But let's get to the nub. Does Social Security "contribute to the deficit"?
The answer is, bluntly, no. By law, it can't contribute to the federal deficit, because Social Security isn't allowed to spend more than it takes in. Those who claim -- as Geithner has at one point or another -- both that the program contributes to the deficit yet will be forced to reduce benefits to retirees once its trust fund is depleted are trying to have things both ways: The reasoning behind the threat of reduced benefits is that Social Security can't engage in spending money it doesn't have, i.e., deficit spending.
Pick one, fellas. If it can contribute to the deficit, then there's no reason to cut benefits.
The confusion arises because people like Geithner forget that almost all of Social Security's revenues come from the payroll tax, though some of that revenue is invested and therefore deferred. The payroll tax is one of the program's three major sources of current income: the others are federal income taxes levied on retiree benefits (about 3.25% of the total in 2012) and interest on the program's Treasury bonds (about 13%).
Those Treasury bonds, however, were purchased with surplus payroll taxes -- the sums collected in advance, starting in 1984, to cover the wave of baby-boomer retirements that is now upon us. Something has had to be done with those funds between their collection and their payout, and that something is investing them in T-bonds, at interest.
Geithner either knows that, or he was an amazingly inattentive T-secretary. You see, every year he served in Washington he put his signature to the Social Security trustees' report that listed the program's T-bond purchases, in numbing detail. (The accountings of trust fund purchases and a list of its holdings from the 2013 Trustees' report are here.)
Let's be charitable, and assume Geithner knew what those purchases signified, where the purchasing funds came from, and how the proceeds would be used when they were needed. Customarily, the funds raised by Treasury bond sales has been used for productive investments by the government, such as road- and bridge-building, scientific research grants and national defense, all of which have helped the economy more than double in size (adjusting for inflation) since the current trust fund began to get funded in 1984.
Of course, there also have been unproductive investments, notably the George W. Bush tax cuts, which disproportionately benefited the wealthy and created a huge deficit at the very time when the country was fighting two wars. But that history tells you that the contributor to the deficit isn't Social Security, but the tax cuts and imprudent financing of the wars.
By blaming Social Security for even a portion of the deficit, Geithner underscores what some reviewers of his book point to as his self-identification with the investment and banking communities. He's now president and managing director of the Wall Street firm Warburg Pincus.
They love to point at Social Security as a guilty party in the deficit, because they know that if they can't blame Social Security recipients for the deficit, the blame will fall on them. But Geithner knows better. Or at least, he should know better. What's his excuse for pretending he doesn't?