The Real Problem with Social Security
Candidates for President are talking about Social Security. Despite the knee-jerk reaction of the Democratic Left, this is a very good thing.
For just a moment, let's ignore the details of what the candidates are saying and revel in the idea that a subject long thought to be untouchable is, in fact, back in play. This is especially important in the wake of the nation's experience with Social Security policy in 2005 and 2006. That was when, you will remember, President Bush first took the important step of generating a major debate over the issue, but then undid all that good by insisting on his improbable plan for private accounts.
Now, Democrats Barack Obama and John Edwards are talking about raising the payroll tax for some upper-income workers as a way to restore long-term financial stability to the retirement system. Republican Fred Thompson has laid out an even more detailed plan that would allow workers to create voluntary personal accounts that would be matched, in part, by the government. Thompson would also slow the growth in the overall program by indexing benefits to prices rather than wages.
Now, each of these ideas has its problems. For instance, Obama and Edwards would impose payroll taxes on wages up to the existing cap (currently $97,500), then earnings would be tax-free up to around $200,000 or $250,000 when wages would again be taxed. Why a lawyer making $250,000 deserves a payroll tax break while his secretary making $40,000 does not eludes me. Still, they have put the issue on the table and bravo for that.
What is especially interesting is the reaction of the Democratic Left. The New York Times' Paul Krugman, for instance, calls Obama a “sucker” for even talking about Social Security. For him, “Social Security isn't a big problem that demands a solution, it's a small problem.”
Well, Paul, actually it is a big problem. It is not as big as, say, Medicare. But, last time I looked, a program that will spend 1.2% of GDP more than collects over the indefinite future has got a problem.
The logic of Krugman et. al. fails me. They seem to be saying that because there are bigger challenges out there, we should not be confronting this one. I think what they really mean is if George Bush identified Social Security as an issue, Democrats must insist it is not. Kind of like WMD.
Years ago, Brookings Institution scholar Belle Sawhill warned liberals about the long-term entitlement problem. Left unchecked, she reminded them, entitlements would absorb funds for programs that were important to Democrats, such as education and children's health. In recent months, we have learned how hard it is for a Democratic Congress to boost spending for these programs, even while the Social Security surplus masks the real deficit. Over the next decade, as the retirement program's annual benefits inexorably exceed its revenues, Democrats will learn just how right Sawhill was, and how wrong Krugman is.
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Social security is imposed on salary, business and earned income because its benefits are loosely based on the taxes paid in. If the earnings cap is lifted, that fiction is destroyed and social security becomes just another welfare program. As a country we need to stop the high tax rates on earned income relative to the extremely low rates on unearned income. One way to do would be to impose the medicare tax, which bears no link to earned income, on both earned and unearned income. The second way would be to lift the earnings cap on the employee's portion of the social security tax, but allow those payments to be credited against the income tax. This would give an additional tax break to workers, recognize that social security has an income supplementation purpose that should be paid from general tax funds but not allow these taxes to be spent outside social security. The employer portion would remain capped and tied to social security benefits. If the earnings cap is lifted, this 15.3% tax would be imposed on top of the 35% federal income tax on the income of family business owners. These owners would have to pay almost 150% of the tax their public company competitors would pay. If the business owner invested in a public company competitor, they would be taxed at only 15% on their profits, but if they invested in their own businesses they would pay about three times as much in tax on the profits.
I'm not sure I understand your concern about Social Security nor your complaint about “the Democratic Left”.
As to the former, Social Security “spend[ing] 1.2% of GDP more than [it] collects over the indefinite future,” while worrisome in theory, doesn't exactly lend itself to providing a compelling reason for fixing the program now. Over the years for which we can somewhat reasonably project the revenues and expenditures of the program (roughly fifty to seventy-five years into the future without any major discrepencies), Social Security remains solvent. Where does the compelling need to fix the problem now come from? (And I'm not advocating waiting until the last possible moment, I'm merely suggesting we can take our time to carefully consider the problem before rushing a “fix” through the political system.)
As to “the Democratic Left”, your argument appears to stem from a lack of care for the realities of politics. A Democratic politician appealing to a Democratic base that wants Social Security to remain largely untouched really would have to be a sucker to believe that he or she could gain votes by promising to change Social Security. The logic of Krugman et. al. is simple and has nothing to do with your WMD analogy: Social Security is not an immediate problem, and there are several immediate problems that need to be addressed in this election, so let's focus on those immediate problems.