Anyone who follows politics will recall the hue and cry that greeted President Bush’s 2005 proposal to allow workers to save a portion of their Social Security payroll taxes in personal accounts. But even many who follow politics today could be forgiven for failing to realize that the incoming Barack Obama administration is, in its stimulus proposal, suggesting something far more radical for Social Security.

For those who don’t recall the specifics of the 2005 debate, let’s refresh the memory. Workers could have saved four percent of their wages, up to a cap of $1000 (rising each year), in Social Security personal accounts. The money would have remained within the broader Social Security system and the accounts administered by the federal government. The money could only be used to fund future retirement benefits, in effect replacing part of an unfunded benefit promise with a funded reality.

Because participation was to be phased in, the amounts of money proposed in 2005 appear modest by the standards of the current economic debate: $30 billion in 2009, $61 B in 2010, and $95 B in 2011. None of this money could have been spent, or diverted to purposes unrelated to funding Social Security benefits.

This 2005 proposal was greeted in superheated tones. The AARP ran television ads comparing even this modest sheltering of payroll taxes with the destruction of someone’s home. The Center on Budget and Policy Priorities warned of dire fiscal consequences, alleging a loss over two decades of $5 trillion from Social Security. Such eye-popping figures were arrived at via a number of assumptions and extrapolations well beyond the specifics of the President’s actual proposal.

Fast forward to 2009. To sell an economic stimulus package, the incoming Obama Administration has urged the passage of what has been termed $300 billion in “tax relief,” including a tax cut for “95% of workers and their families.” When during the 2008 campaign it was pointed out that far less than 95% of Americans actually even pay income taxes, the Obama campaign asserted that there would nevertheless be tax relief in the form of a refund against payroll taxes — in other words, Social Security.

The use of the preposition “against” is a classic example of Washington-speak that confuses the reality of what is being proposed. In this case, the terminology blurs the answer to the question: will workers be receiving a refund of payroll taxes, or not?  This bothered me enough to contact an expert on Social Security policy, a friend of mine, who had the same grave concerns about this proposal.

If the answer is “no,” then the proposal is for a spending program, not tax relief, and should be understood as such. If the answer is “yes, workers are receiving a refund of their Social Security payroll taxes,” then a new problem arises.  We cannot simultaneously send this money back to taxpayers and deposit it in the Social Security Trust Fund at the same time. One can’t do both without double-counting the money.

Again, hearken back to the 2005 Social Security debate. Then, the Bush Administration did not paper over the reality that money could be invested either in personal accounts, or in the Social Security Trust Fund, but not both. The Bush administration accompanied the proposal with the public release of a memorandum from the Social Security Chief Actuary showing its impact on the Trust Fund.

Critics of Social Security reform had not hesitated to charge the administration in advance with double-counting. In a December, 2004 conference call outlining pre-emptive opposition to President Bush’s anticipated proposal (featuring economic experts who would later advise President-elect Obama), the suggestion even that money would be borrowed to pay for the transition to personal accounts was greeted with derision, including the flippant charge, You’d go straight to jail, and deservedly so if such a dastardly thing were tried in the corporate world.

What a difference a few years makes. Now we are talking about potentially diverting far greater annual amounts of payroll taxes, not as a transition to lower Social Security obligations but to induce stimulative consumption separate and apart from Social Security — and, by the way, to increase borrowing far more in the interim. This has been greeted by a singular lack of curiosity about the effects upon Social Security’s finances and accounting integrity.

It may well be that relief from payroll taxes is indeed the right medicine for our economy, in the midst of a deep recession. It would provide broad-based relief to a wide spectrum of Americans with a minimum of economic distortions. It would be far more stimulative than the various pork-barrel infrastructure initiatives that have been rumored in press discussions, although this appears as an addition to those initiatives and not as an alternative to them.  Further, this kind of shell game would not just postpone our eventual reckoning on entitlement reform, but actively make it much worse.  Maybe we need to do that, but it sounds a lot like the hair of the dog that bit us.

We have room for honest disagreement about the right medicine for our economic woes, but no room for misrepresentation. If we are in fact returning payroll taxes to working Americans, then this loss of revenue should be reflected transparently in the Social Security Trust Fund account.

There are only two other options, neither of them desirable: indefensibly double-count the money, or replace the revenue lost to Social Security from general revenues (read: income taxes) – that is, end Social Security’s self-financing ethic.

Turning to general revenue financing of Social Security is a severe step that warrants acknowledgment and debate before being taken. At the very least, its accounting implications should be confronted head-on. For starters, such a step would render meaningless – if not outright deceptive – the amounts reported to taxpayers as having been contributed to Social Security on their W-2s.

Whatever is decided, truth in budgeting must be observed. Proposals to spend should be acknowledged as proposals to spend. Proposals to refund payroll taxes should acknowledge their effects on Social Security. Anything else falls short of the transparency that Americans deserve at this critical time.