President George W. Bush continues to confound those who think conservatives oppose change while liberals (or “progressives,” as they now prefer to be called) support it.
In his February 2 State of the Union address, Bush called for reform of environmental regulations to make them more cost effective, tort reform to limit lawsuit abuse, tax simplification, and reducing or eliminating 150 federal government programs.
Most controversial is Bush’s call to “strengthen and save” Social Security, the nearly 70-year-old entitlement program that will be unable to continue to pay benefits in as little as 12 years according to some measures or around 2040 according to others. “Progressives,” so eager to boldly go where no society has gone before in other areas of social and economic policy, are afraid to touch Social Security.
Bankruptcy Looms
Social Security was sold to voters and workers by Franklin D. Roosevelt as a forced savings program, with every worker given his or her own account. It was good politics, but a big lie. The individual accounts are an accounting fiction. Past retirees got vastly more than they paid in, recent retirees are likely to get about what they put in (but with little or no interest), and future retirees are likely to get much less, even assuming the program stays “solvent.”
I put the word solvent in quotation marks because by generally accepted accounting principles, Social Security is already bankrupt. By 2018, spending will exceed revenues and by 2042, the so-called Trust Fund will be empty. The Trust Fund, however, is already empty. Social Security has long operated as a pay-as-you-go scheme, with taxes paid by workers today going to pay for benefits of those already retired. The “surplus” was invested in government bonds and immediately spent by the federal government.
Since the federal government is in debt to the tune of $7.4 trillion (an amount that is rising by half-a-trillion dollars a year), those bonds cannot be redeemed without spending cuts or tax hikes equal to the amount due.
Other Reasons for Reform
The impending bankruptcy of the Social Security system is a compelling reason for reform, but not the only reason. Social Security is profoundly unfair to women who work, who receive fewer benefits than men, and to blacks, who have shorter lifespans and therefore are less likely to collect benefits or collect them for as long as whites. It is unfair to anyone who dies before retirement because all the money paid in Social Security taxes, except for a token death benefit, is kept by the government. Your heirs get nothing.
Social Security is a job killer because it increases the cost of hiring someone by 12.4 percent–the total of the employer and employee’s share of Social Security taxes. It discourages personal savings and investment in stocks and bonds by offering the false promise of a government-financed comfortable retirement. It has severely handicapped the creation of a market for long-term care insurance, which could be a private alternative to welfare for the elderly.
In all these ways, Social Security falls far short of what we would want and expect from a modern retirement program.
Small Reforms Aren’t Enough
Democrats and some Republicans say we can save Social Security simply by raising the payroll tax or lifting the cap of $90,000 on the amount of income on which the tax is owed. There are several problems with this. The payroll tax is already too high: Most Americans pay more in Social Security taxes than they pay in personal income taxes, and it’s a major obstacle to savings and investment for millions of low- and middle-income Americans.
The Social Security tax rate in 1965 was about 2 percent. Now it’s 12.4 percent. In 40 years it would have to be 18 percent or higher to keep up with the demands of retiring baby boomers. That would be on top of federal and state income taxes, sales taxes, property taxes, and all the other taxes people pay. The combined weight of such a tax burden would be profoundly unjust and crush the economy.
Raising the cap on taxable income means concentrating the cost on the most productive people in the country, the same people who already pay 80 percent or more of personal income taxes and who are our only hope of winning the economic competition with China, India, and other rapidly growing nations. If you oppose “outsourcing,” you should oppose raising the Social Security income cap.
The collapse of Social Security can be put off by gradually raising the age at which people qualify for benefits and slowing the rate of benefit growth by tying it to the rate of inflation rather than income growth. But these reforms do not address the underlying unfairness, inefficiency, and unintended consequences of the program.
As Bob Costello wrote a year ago, “We need to turn the current Social Security crisis into an opportunity to modernize the system to give individual workers control and ownership over their retirement assets. [Personal Retirement Accounts] would give every worker dignity and a sound, stable financial plan that no one–not even the politicians–could take away.”
Big Reforms
During his State of the Union address, Bush ruled out raising Social Security taxes but said everything else is on the table. He particularly wants to allow individuals to put part of their Social Security taxes into privately managed savings accounts. He assured people who are 55 or older, “For you, the Social Security system will not change in any way.”
Bush’s plan, which is only the starting point for negotiation, would allow individuals born after 1950 to divert about two-thirds of their payroll taxes (about 4 percent of gross income), up to a cap of $1,000 a year, into private retirement accounts. The cap would increase by $100 a year after the first year. People choosing to open these accounts would see their benefits under Social Security reduced proportionately.
The creation of private savings accounts is a good idea, though Bush’s plan is too modest. Accounts much larger than those Bush proposes would empower people by giving them more say in their savings and retirement planning. Such empowerment would make them act more responsibly, which benefits everyone.
Private accounts reduce the unfairness of Social Security to women and minorities by giving them access to the funds they set aside for retirement and making it inheritable. Private accounts would stimulate economic growth because account managers would invest in stocks and bonds, which support businesses that are creating new products and expanding markets. Faster economic growth, in turn, fuels the tax revenues needed to keep the rest of the Social Security program viable.
The long-term viability of Social Security is also enhanced because every dollar diverted from the program means at least a dollar less in future liability. This is why talk of a “transition cost” for the Bush plan is very misleading. In the short term, the diversion of funds may create the appearance of a larger deficit, but the long-term liability is decreased by an equal or larger amount, so there is no actual cost.
Reform Will Be Difficult
Despite the strong case for privatizing Social Security and high expectations created by Bush and some beltway think tanks, the path to reform will be long and difficult. It will probably take years for the House and Senate to agree on a reform plan, with nearly all Democrats opposing the process every step of the way. Special-interest groups such as organized labor and AARP will use the issue to raise hundreds of millions of dollars from their members to wage misleading campaigns to “save Social Security.”
Social Security reform is a good idea, and one that will be debated for many years. But don’t expect quick political action.
