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What’s Conservative About Social Security Reform?
A desire for big personal accounts shouldn't trump concerns about ballooning costs.


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Ramesh Ponnuru

I’ve been criticized, most recently by Larry Hunter in the New York Sun, for my January 25 article on National Review Online arguing that conservatives need to maintain a strategic perspective on the rising tax burdens that will follow from a failure to fix Social Security. Hunter wrote:

Unfortunately, some conservatives don’t appreciate the prudence of a strategic retreat. Illustrative is the vice president for policy and economics at the Independent Women’s Forum, Carrie Lukas, who in a January 25 article on National Review Online attacked Mr. Pence as “unprincipled” and “foolish” for rejecting new taxes. Shame on her.

First, I didn’t call Mr. Pence “unprincipled” or “foolish”; I characterized the myopic objection to some, but not other, tax increases that might occur as a part of a reform of Social Security as a misapplication of an important conservative principle — to keep taxes low — and one that leads to a foolish result.

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I am not arguing that conservatives should be less vigilant about rising tax burdens. I am arguing that conservatives should be more vigilant, and not be duped by scenarios in which we pretend to be holding the line on taxes but in reality accede to a massive increase in future tax burdens.

Three questions underlie the current debate within the conservative movement about how to approach Social Security reform. First, what constitutes a tax increase? Second, what’s the conservative goal for Social Security reform? And finally, what is politically the best way to achieve that goal?

On the first question, there are those like Larry Hunter and Peter Ferrara who focus solely on holding the political line on no new taxes within Social Security. It’s an admirable goal with which I and most conservatives will agree: Social Security already eats up 12.4 percent of workers’ paychecks, and workers shouldn’t have to dump more money into this poorly constructed transfer program. However, when we consider Social Security from a broader perspective, it’s important to look not just at Social Security’s payroll-tax rates and the amount of income subject to that tax, but also to consider the system’s overall demands on taxpayers.

In ten years, Social Security won’t require just the 12.4 percent payroll tax to pay benefits; it will also demand general revenues, which are primarily generated by income taxes. Over the next 35 years, under current law, Social Security’s effective tax rate will climb 40 percent to roughly 17 percent of worker wages, even though technically the Social Security payroll-tax rate will stay at 12.4 percent.

Conservatives cannot afford to treat this cost increase as a non-event. It’s a real rising tax burden, and it will reduce the real take-home pay of wage-earners. The status quo is an enormous defeat for those who believe in low taxes and limited government, and a big victory for those who want government to expand.

Conservatives familiar with the history of the Social Security debate know that they need to look not only at the payroll-tax rate, but also at how much of income taxes is committed to the program. It’s easy to make Social Security’s numbers balance without changing payroll tax rates if you are willing to dump enough income taxes into the program. Shifting the burden to the income tax is what many liberals would love to do, since it would require “the rich” to shoulder more of the burden. This was actually Vice President Al Gore’s strategy: simply inflate the value of the trust fund with enough general revenues to pay all promised benefits and the problem is solved! Conservatives know better: Taxes are taxes whether they are raised through payroll taxes, the personal income tax, or levied on corporations.

Some Republicans have championed reform plans that include big personal accounts, but do nothing to address Social Security’s liabilities. There are merits to these plans, but we shouldn’t pretend that they don’t have real costs for taxpayers. Ignore what precisely the revenue sources are and look just at how much the program costs — that way you’ll know how much of a burden the system will place on taxpayers. (For example, Peter Ferrara’s proposal explicitly depends on an additional $7.9 trillion in corporate income taxes over the next 75 years. Taxpayers should be as concerned about that tax increase as they are about any other.)

On the second issue (the conservative goal on Social Security reform), the clear answer is that conservatives want to transform the tax-and-spend New Deal program into a system based on savings and investment, in which individuals’ payroll taxes are used to fund personal retirement accounts.

However, big personal retirement accounts cannot be the only measure of a plan’s “conservatism.” One of the most bizarre aspects of the debate about conservative Social Security reform is that some conservatives ignore the importance of controlling the growing burden of Social Security as we transition to a personal account system. Indeed, many of the most tax-heavy proposals have been offered by conservatives who have refused to discuss any reduction of the benefits promised (but unpayable) under current law.

For example, they recoiled from the president’s sensible plan to slow the growth of future benefits for those in the upper- and middle-income brackets. The president didn’t propose changing the benefits of those already receiving Social Security or those with low incomes who will depend on Social Security at retirement (in fact, the president’s plan would have increased benefits for lower-income retirees relative to the benefits the current system can afford to pay). The president’s plan simply would have made Social Security benefits stay the same in real terms for the top 0.5 percent of earners, instead of growing in excess of inflation, and would have allowed benefits to grow faster than inflation for everyone else. That alone would have done a lot to reduce the government’s — and that means the taxpayers’ — liabilities.

Clearly it would be easier to transition to a system based on personal investment if we didn’t have the current system’s liabilities hanging over us. Conservatives need to consider how commonsense changes to future benefits can accomplish these goals.

Conservatives’ unwillingness to discuss benefit cuts clearly stems from their desire to answer the third question: What is politically the best way to achieve the conservative goal for Social Security? Many have decided that benefit cuts must be entirely taken off the table and that the only hope is to sell the large personal accounts while avoiding discussing the costs of transitioning to such a system. This plan depends on a groundswell of support from the public and a complete Republican takeover of Congress — and a takeover by Republicans who are willing to radically change Social Security without any Democratic support.

Anyone who watched the last Republican Congress knows that’s a long shot. It seems more probable that Republicans will need cover from some Democrats — many of whom are concerned about Social Security’s long-term costs since they will squeeze out spending on other programs — to address Social Security’s financial shortfall while creating personal accounts within Social Security. These accounts might have to be small at first, but we can be confident that once people see money growing in their accounts they will want more of their money going towards them.

Certainly there are perils to trying to negotiate a reform package with Democrats. Conservatives would need to be prepared to walk away from any plan that relies on tax increases or fails to advance the overall goal of moving toward a savings-based system. Yet conservatives shouldn’t celebrate having another two years pass by without Social Security reform. During the next two years, the amount of wages subject to the payroll tax will climb and Social Security’s unfunded liabilities will rise by $1.2 trillion, making it that much more difficult to transition to a system of personal accounts.

That’s not a victory for the low tax — or the conservative — cause.

Carrie Lukas is the vice president for policy and economics at the Independent Women’s Forum. She is the author of The Politically Incorrect Guide to Women, Sex, and Feminism.



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