During a recent appearance on Meet the Press, Barack Obama criticized Hillary Clinton for ducking the issue of how she would deal with Social Security’s looming financial crisis. He was certainly right about Sen. Clinton’s lack of courage. Faced with a system that will begin running a deficit in less than 10 years and $15.5 trillion in unfunded liabilities, Sen. Clinton called for…(drumroll, please)…a bipartisan commission.
We’ve had bipartisan commissions for years. There were two during her husband’s presidency alone, the Kerrey-Danforth Commission and the Social Security advisory Council. Every one of these commissions has come back with the same answer. There are only three ways to fix Social Security: raise taxes, cut benefits, or invest privately. Does Mrs. Clinton seriously expect yet another commission to come back with some miracle that repeals the basic laws of arithmetic?
Sen. Clinton’s other answer is even less comprehensible, “restore fiscal responsibility.” Now, fiscal responsibility is a fine thing, and it would be wonderful to see some after eight years of the free-spending Bush administration. Of course, given Mrs. Clinton’s proposals of increased spending for everything from national health care to baby allowances, its hard to imagine how much responsibility there will be. But far more important, fiscal responsibility will do almost nothing to fix Social Security. Indeed, during her husband’s presumably more fiscally responsible time in office, Social Security’s solvency actually deteriorated.
By comparison, Sen. Clinton’s recent contretemps over drivers licenses for illegal immigrants looks like a model of straight talk. As the frontrunner for the Democratic nomination, she owes the American people a little more courage — and a lot more honesty.
Sen. Obama, on the other hand, at least had the courage to face up to the problem and offer a proposal to fix it. Unfortunately, it’s the wrong one.
Currently, only the first $97,500 of annual wages is subject to the payroll tax. Sen. Obama wants to remove that cap and tax all wages. This would be the largest tax increase in U.S. history, more than $1.3 trillion in new taxes over the first ten years alone, with significant consequences for taxpayers and the American economy. As bad as that would be in the aggregate, it would be even worse for individual workers. Some 9.2 million Americans would see their taxes increased.
Obama’s tax increase would saddle the United States with the highest marginal tax rate in the world — higher even than countries like Sweden. Studies based on the WEFA macroeconomic model, a metric developed by economists at the Wharton School of Business and employed widely by Fortune 500 companies, suggest that they would cost the United States as much as $136 billion in lost economic growth over the next 10 years, and as many as 1.1 million lost jobs.
In exchange for this economic catastrophe, we would gain surprisingly little in terms of Social Security’s finances. Even completely eliminating the cap, without allowing any additional credit toward benefits, would result in only eight additional years of cash-flow solvency. Rather than beginning to run a deficit in 2017, Social Security would continue to run a surplus until 2025. That’s very little gain for so much pain.
Nor would eliminating the cap address Social Security’s other problems. It would not enable workers to decide how their money is invested. It would not allow low- and middle-income workers to accumulate a nest egg of real, inheritable wealth. It would not improve Social Security’s rate of return for younger workers.
Social Security is far too important an issue to ignore. Unless we do something to deal with it, we will be passing a crushing burden of debt and taxes onto our children and grandchildren. Sen. Obama’s proposal may not be the right answer, but at least he has forced the issue into the public debate. Let’s hope some of the other candidates (are you listening, Sen. Clinton?) have the courage to join that debate.
– Michael Tanner is director of health and welfare studies at the Cato Institute.