Politics & Policy

Graham Crackers On Social Security

Who's advising the senior senator from South Carolina?

Just when I thought it was safe to go out . . .

As a resident of South Carolina for the past four years, it has been a pleasure to see this conservative state become dominated by elected Republican officials. Jim DeMint was recently elected as the second Republican senator from the state. He joins Sen. Lindsey Graham, who is well known for his participation in the Clinton impeachment process. One would think that President Bush could count on the support of such stalwart Republicans as DeMint and Graham as he sets out to reform Social Security through partial privatization.

But according to our local New York Times-affiliated newspaper, the Island Packet, while Sen. Graham is “a long term advocate of this plan, he also apparently is a realist.” In the Packet’s editorial eyes, realism and raising taxes are equivalent.

The Packet reports that Graham is considering the option to raise the annual tax cap on Social Security earnings from $87,500 to $150,000. That amounts to additional payroll taxes of up to $3,875 a year for upper-income taxpayers. While I haven’t fully worked through the numbers, that sounds like a tax increase of $7,750 for self-employed entrepreneurs who make $150,000 per year.

I don’t know who Graham hires to advise him on economics, but as far as I’m concerned they should be referred to as Graham Crackers.

First of all, raising taxes on “upper income” taxpayers doesn’t make sense. Entrepreneurs will get hit hard by this tax. Such an increase reminds me of the tax-increase proposals of Mondale, Dukakis, and Kerry — all of whom are Democrats. Graham should know better.

The logic behind the Packet’s opposition to partial privatization is that “the shift of funds from the Social Security trust fund to individual retirement accounts ultimately would be a wash. The shift would leave the government short of money.” How weird is that statement? The shift would allow an individual to save for his retirement and then allow his families to rely on that money after he has passed on. Today’s Social Security death benefit is a whopping $255. Try buying a funeral with that.

Let’s also understand that the so-called “money” that is “saved” in the Social Security trust fund is bogus. The fund holds government securities that pay low market rates to the trust fund. Even if the fund is fully “funded,” it will still hold only government paper. When payment to beneficiaries comes due because current contributions are exceeded by claims, the government has to sell those bonds to get the money to pay beneficiaries.

Yet either the Packet’s editors or the Graham Crackers have come up with this novel concern: “What if the extra government borrowing has a calamitous effect on the value of the dollar and interest rates?” That’s the same old boogeyman threat we hear from opponents of the president’s plan. But let’s get serious. To link government borrowing with higher interest rates is a spurious claim as evidenced by our recent record budget deficits coupled with record low long-term interest rates.

The Packet continues: “what if private investments go south?” (Does that mean they go south of the Mason Dixon line, disappear, or suffer a temporary downtrend in a long-term rising equity market?) History demonstrates that private investments fluctuate in value in the short-term. However, if properly diversified, history tells us that a retirement plan’s probability of losing money is near zero. And let’s not forget that, in the short term, government bonds lost half their value back in the 1970s — so don’t just lay the blame on the short-term volatility of private markets.

The Graham Crackers ought to get off the Democratic bandwagon of raising taxes on hard working Americans to solve the problems of government. Tax policies that undermine growth will also undermine the very social programs they are designed to help. Just ask the 120,000 boat builders who lost their jobs when Democrats pushed through a big luxury tax on private yachts.

– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and chief investment officer for Victoria Capital Management, Inc.

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