By Stephen Moore and Peter Ferrara
The Associated Press blares the headline that all conservatives have been dreading: “GOP Considers Dropping Personal Accounts.” The story begins, “Senate Republican leaders are considering whether to seek Democratic support for Social Security legislation without the personal accounts.” The story continues, “top Republicans discussed an approach under which they would effectively acquiesce in an attempt to test the waters for bipartisan legislation without personal accounts.”
What would be included in such legislation? The story cites “extending the payroll tax beyond the current $90,000 in income” and “raising the retirement age.” It also refers to a proposal advanced by Sen. Robert Bennett (R., Utah) called progressive price indexing. Under such a plan, future promised benefits would be reduced for workers earning over $30,000 per year, with promised benefits reduced more the higher a worker’s income goes.
There’s an old saying that applies to politics: “Don’t throw the baby out with the bath water.” This latest GOP capitulation to the Democrats would throw the baby out and keep the bath water. It would be reminiscent of the counterproductive deal the White House struck on education reform a few years ago. The one and only conservative idea in the bill — school vouchers — was dropped, and the liberals got their whole bag of goodies. It was a package that only Ted Kennedy could love.
Is history repeating itself?
The Senate moderate plan leaves free-market reforms on the cutting board and thus will not solve the problems of Social Security. Raising taxes and reducing future promised benefits in the ways that are being proposed would reduce the already miserable rate of return offered by Social Security for all workers earning over $30,000 per year. Indeed, so-called progressive price indexing would allow taxes on wages to grow while benefits increase at a slower rate. That means Social Security’s rate of return for workers would decline each and every year in perpetuity. The returns for about half of all workers would be driven into the negative range and become more and more negative each year.
This is the message Republicans want to send?
The payroll-tax increase being proposed by Senate moderates would raise the top marginal tax rate for workers earning over $90,000 per year by a whopping 12.4 percentage points. This discourages work, productivity, and entrepreneurship and reverses the positive impact of the tax cuts passed in Bush’s first term.
In addition, by dropping personal accounts, such a package would fumble away the opportunity for the greatest reduction in government taxes, spending, and debt in world history. For example, the Ryan-Sununu plan, which includes personal accounts, would reduce federal spending as a percent of GDP by 6.5 percentage points, with workers getting far better benefits and returns through the private capital markets.
The only way Republicans are going to succeed on this issue is by advancing a reform plan that focuses on personal accounts and does not include tax increases or benefit cuts. The Ryan-Sununu plan fits that bill. The reform message must focus on the enormous, positive, and populist benefits that such a plan offers workers. With such a plan in hand, the Bush administration can successfully go over the heads of Democrats and liberals and take the case for reform directly to the people. Grassroots support can then torch enough Democrats and wavering Republicans to get personal accounts passed.
All that said, such a reform plan is the only way to solve the financial crisis of Social Security. Workers would get much better returns and benefits through personal accounts. And the large accounts in Ryan-Sununu would shift so much of the future benefit obligations of Social Security to the accounts that the Social Security program would be left in permanent surplus.
President Bush campaigned boldly and successfully for personal accounts in 2000 and 2004. But his pro-growth agenda on Social Security is now being hijacked by Senate Republican moderates who abhor free-market solutions. Bush whipped the moderates back into shape on his tax-cut agenda and it will take just that kind of leadership from the White House to get the Social Security debate back on the message of freedom, ownership, and individual control. The president simply must reject any plan that drops personal accounts.
– Stephen Moore is president of the Free Enterprise Fund. Peter Ferrara is director of the Social Security Project for the Free Enterprise Fund, and is also a senior fellow at the Institute for Policy Innovation.