Is Social Security Pay As You Go?

I have pretty strong beliefs about social security reform -- I'm for it.  More specifically, I favor a transition to some type of private-account scheme.  But I like to think of myself as a reasonable person as well, so I try to understand the arguments of those who disagree with my position.

So, with that preamble, I'd like to air out an issue on which I am truly confused. It popped up once again in one of yesterday's posts at Angry Bear.  Therein, pgl defends the following statement from an interview with University of Michigan professor James Morgan, published by the Ann Arbor News.

Q. What do you think is the biggest misconception that people have about Social Security?

A. The misconception is that the workers are paying for the benefits of the retired people. The fact that the government takes money from one group and gives it to another doesn't mean that they are paying for it, so the real economics of it is that every generation pays its own way.

In the comment section, one of Angry Bear's readers essentially says "Huh?", and pgl responds.

... the genius of the Greenspan reforms was supposed to be that we'd prefund the retirements of the Baby Boomers. Then again, I'm assuming Greenspan was not really advocating employment tax increases to subsidize General Fund deficits so capital income could have tax rate reductions. So no, pay as you go is not the current system unless Greenspan was playing 3-card monte.

I think pgl means (as a subsequent commenter points out) something like "not entirely pay as you go," as it is clear that all current benefits are paid out of current payroll taxes, and the lion's share of future benefits will be paid out of contemporaneously collected taxes.  So that's not really at issue.  What is at issue -- and I think the ultimate source of disagreement between those of us who favor "privatization"  and those who don't -- is the meaning of the "trust fund."

I'll be plain.  To me, the trust fund means exactly nothing.  I'll give you the analogy that sings to me.  Suppose I tell you I will be your "trust fund manager."  You give me $100 bucks, and I immediately blow it on a sumptuous meal.  I guess you'd be a bit alarmed.  I'm pretty sure you would not be inclined to think of my repast as an adequate funding of your promised payback.

So why do we claim that social security is funded when the government, in effect, takes our payroll contributions and treats itself (or others) to some extra consumption?

I think the distinction that the current system's defenders want to make is a moral one, not an economic one.  At least that's how this statement from one of Max Sawicky's early posts in a string of extended framing debate between him and Andrew Samwick, sounds to me

Workers have paid and will pay enough into the Social Security Trust Fund to finance full benefits until 2042. The Federal government is obligated to redeem its debt to the Trust Fund with its own separate revenues, chiefly the income tax. The fact that G. Bush has gutted the income tax is his own damn fault, and somebody will have to reverse that decision if the debt to beneficiaries is to be honored…

The emphasis is added.  I'm pretty sure that pgl believes the same, as he endorsed this comment on an earlier post of mine from Brad Setser:

from 2018 to 2042, the transfers are payback for the fact that SS payroll taxes have exceeded SS benefits since the 80s reforms -- i.e. they represent past payroll tax surpluses plus interest. After 2042, those transfers could be continued but they would be simple "transfers", not payback for past payroll tax surpluses lent to the government.

It is fair to point out that general revenue transfers start in 2018, but i think it is important to also note that just represents the point where the system draws on its accumulated assets (past surpluses) to start making payments. I suspect Sawicky is making a distinction between giving the social security system its past surpluses back with interest, and simple one way transfers.

You might convert this to an economic position by appealing to a time inconsistency argument, or as some have done, make the related suggestion that repudiation of debt would have disastrous consequences.  But then I have two questions.  First, does anyone seriously believe that  "repudiating" the accumulated social security surpluses by altering benefit rules would be viewed as the same sort of thing as refusing to pay off debt held by foreign governments or the public?  Do you believe, in fact,that it would create even a perceptible ripple in the deep waters of our financial markets? If you answer "no," then aren't you admitting that the the world perceives the trust fund as little more than an accounting gimmick?

And, second, what makes social security so special?  Is the promise to transfer income through the social security system more holy than the promise that, if I save a dollar today, the government won't come around tomorrow and appropriate more of it than they said they would when I socked it away?  I don't think I am off base in suggesting that many defenders of the social security status quo propose such policies with regularity.  It might or not might not be wise, but where, I ask, is the moral high ground?

There, got that off my chest.  My enlightenment awaits.