President Bush’s commitment to establish a Social Security legacy may be on a collision course with the Democratic Congress. The contours of a deal are starting to appear around a payroll-tax increase and cuts in promised future benefits for higher income workers — both of which spell major collateral damage for American workers. Meanwhile, personal accounts may not be included in any compromise deal.
Taken together, these measures are entirely about what’s best for government: They are about finding a way to make the books balance on paper so that the feds can keep spending our Social Security dollars on unrelated, wasteful programs.
In truth, Social Security has a problem that’s even bigger than its impending insolvency, and it is a terrible deal for young workers. Because I’m young, single, and male, Social Security promises me a 1.5 percent real rate of return. And that’s what it promises. What it can afford to pay is more like half a percent, which is more like passbook interest than an investment return.
The problem today is not that Social Security benefits are too high; it’s that they’re so much lower than real investments could provide. Any increases in Social Security taxes, or cuts in benefits, would only make a bad deal worse, giving young workers what would amount to a negative return.
Raising the wage cap is a key part of the rumored White House bargain with Democrats. The wage cap is the amount of income that is subject to Social Security taxes. So, a worker with a $125,000 income could face a tax hike of $3,400 next year if the cap, $97,500 for 2007, is raised to apply to all of that worker’s income. This would cancel out many of the gains of the Bush income-tax cuts, the president’s signature policy achievement.
Each of these workers will already pay more than $12,000 next year in Social Security payroll taxes (the effective tax burden includes both the employer and the employee share) for a retirement benefit that is nowhere commensurate with what they paid in. Why make a bad deal worse?
The AARP is calling the tax-hike-for-future-benefit-cuts deal a “balanced bargain.” But two anti-worker measures don’t balance each other out — they just tilt the scales even further away from workers and towards big government.
Fifty years ago there were 16 workers for every retiree. Now there are 3, and soon there will be only 2. If Social Security continues to be a transfer payment, it will place an incredible strain on workers in the near future and help derail economic growth. Higher payroll taxes would kill jobs, slow the economy, and harm the financial markets. Social Security simply cannot be propped up in its present structure without damaging American workers and the economy.
The present political obsession with Social Security’s solvency parallels the obsession with eliminating the budget deficit. Balanced budgets and trust funds in actuarial balance are only good things when overall spending is restricted. In its most recent long-range fiscal policy brief, the Congressional Budget Office projected that government will consume between 38 and 55 percent of the economy by 2050, largely because of entitlements. If that is allowed to happen, and especially if taxes are raised to fully fund those obligations, government will place a crushing burden on the U.S. economy.
Fortunately, this is a crisis with a solution. Long-time Social Security-reform advocate Peter Ferrara of the Institute for Policy Innovation has devised a plan that would achieve full solvency in a pro-worker way. The plan would create relatively small personal accounts, averaging just 3.2 percent of payrolls, that could be funded for the first several years simply by stopping Congress from raiding Social Security surplus funds for use elsewhere. There are strong indications that accounts of this small size, because of the high rates of return they would earn, would be scored by Social Security’s actuaries as achieving full solvency while paying workers higher, not lower, benefits than the existing system promises.
The Ferrara plan also includes a novel proposal for financing the transition costs to this partially personalized system: following through on welfare reform. Block-granting and capping Medicaid funds to the states on the successful model of AFDC (Aid to Families with Dependent Children) would free up enough federal funds to finance the transition without diverting funds from the old Social Security system. Two big entitlement programs would be effectively reformed under this plan.
This pro-worker approach is sounder on both policy and political grounds than the White House’s grand anti-worker bargain. Personal accounts consistently polled above 60 percent in early 2005 — before Bush began tying them to toxic cuts in promised future benefits that cratered public support. Dumping popular personal accounts and grafting an unpopular tax hike to the already hated cuts in promised future benefits could establish precisely the legacy George W. Bush doesn’t want — decades of a congressional Republican minority.
– Phil Kerpen is director of policy for Americans for Prosperity.