Social Security
It's been a while since we've had a nice meaty political discussion, so I thought I'd throw this out there. What, if anything, would Math Hutters like to see done to shore up Social Security?
I'll post my opinion in a comment.
I'll post my opinion in a comment.
5 Comments:
If we accept the premise that we cannot continue to promise benefits that escalate faster than social security revenue does, we are either going to have to raise taxes or cut benefits. Raising the tax rate above the current 12.4% would obviously be quite regressive, so that is probably not a viable choice. Raising the social security cap above $90,000 would be an option. Cutting benefits would be another viable option.
Raising the cap
Raising the $90,000 cap would certainly bring more money into the system. If benefits were unchanged, most analysts agree that removing the cap would get relatively close to eliminating the social security deficit. The premise that benefits would be unchanged, though, seems dubious.
Since social security benefits are tied to contributions, capping the amount of income subject to social security taxes puts a natural limit on the maximum social security check. If we uncapped, or raised the cap on contributions, it would seem natural that benefits would also be raised. If we accept the premise that social security is a pure entitlement, not a form of welfare, we would have to raise the wealthiest American's benefits to match their increased contributions, which both eliminates much of the benefit of raising the cap and creates the somewhat absurd scenario of retired CEO's getting social security payments hundreds of times larger than the workers they employed.
Of course, the democrats would also have to have the courage of their convictions to suggest this sort of thing. I've seen no evidence that they would be willing to go out on a limb to suggest raising taxes, though.
Cutting benefits
Reducing benefits, particularly at the higher end of the current contribution level, seems like a much simpler solution. Bush's proposal to index low-income benefits to wage growth and high-income benefits to inflation with hybrid indexing in the middle. strikes the right balance to me.
The major objection to this approach seems to be that it has the potential to turn social security into a welfare program rather than an entitlement. If people are less and less dependent on social security, the thinking goes, they will be less and less interested in preserving the program and more and more willing to scrap it entirely.
This argument seems to spotlight many of the problems the left has articulating a vision to the American people. First, this argument puts the primary focus on saving a government program, not on the actual goal, which is presumably to ensure that seniors do not live in poverty. When republicans talk about curtailing a program, they talk about the benefits that people are likely to see-- more control over their local schools, more control over where their money goes, etc. The democrats talk in the abstract about programs, offices, administrations-- things that appeal to the inner policy wonk; republicans talk in concrete terms about the effect of those programs and how those effects might be changed. The same thing can be seen in the fillibuster/ judicial nominee fight-- if the democrats believe there are a dozen fringe nominees, they ought to be going on every Sunday talk show they can enumerating why these guys are nutjobs rather than fighing about undemocratic Senate rules that most Americans don't care about and don't understand in the first place.
Second, the argument shows a fundamental timidity about the left's core principles. The left seems desparately concerned that this is the next step in "ending welfare as we know it" and reversing FDR's reforms. If you honestly examine FDR's administration, though, you'll note a couple of things-- FDR strongly disliked the thought of government paying welfare benefits and FDR recognized a fundamental difference between the government's responsibility to the elderly and the government's responsibility to able-bodied young men and women. If you read FDR's speeches, he was frequently more critical of the corrupting nature of government welfare programs than were Republican congressmen in 96. He, like most of middle america, strongly preferred finding ways to put people to work. Heck, one of the main criticisms of depression-era workfare programs was that the government wouldn't spend the money to buy equipment to allow people to do more than rake leaves in the park. On the other hand, FDR, like most of middle America, recognizes that the elderly are hardly in a position to pull themselves up-- 75 year olds aren't going to start climbing the corporate ladder. If the democrats recognize this, the "slippery slope" argument loses much of its traction. Responsible people won't accept a change that forces their parents into the streets, though they welcomed changes that gave their kids a kick in the pants in 96.
Third, the argument demonstrates a fundamental inability in the party to make tactical proposals to counter republicans. Rather than taking Bush's proposal and suggesting changes/ additions that would make it more palatable to the left-- changing how the two indexes are weighted in the hybrid indexing scheme, suggesting increases in the cap, suggesting a social security tax on estates, etc-- they seem able only to oppose any change. This makes their position incredibly brittle-- they have no fallback position if the republicans try to push something through this term. They forgo the opportunity to find a personality that they can either rally around or that can provide useful cover for the more hard-line elements (think of John McCain here). They forgo the opportunity to embarass the republicans by finding a solution that is more acceptable to more people. In short, they've fallen into basically the same trap the Republican congressional minority did for the decades they were out of power-- they've become afraid to be a party of ideas.
Actually, the fact that the Democrats haven't put forth any concrete proposals on Social Security shows that they're finally getting the political message. When your enemy is shooting himself in the foot, it is not the time to point out that you have feet too. In this case, that means that if the Republicans are going to put forth proposals that are rightfully unpopular with the general public, the Democrats aren't going to put their own ideas out there for the Republicans to target. Should S.S. reform gain traction, you can expect the Democrats to unveil their S.S. plan.
But since I'm not in office, I can suggest two plans:
1. Tweaking the system
First, raising the cap on money taxed by S.S. is an absolute must. It's also an easy argument to make. Someone on dailykos framed it as follows: Alex Rodriguez earns $90,000 in n innings of the season opener. Can't we ask A. Rod to contribute for a whole game? Really, there's no good reason to have a cap at all.
Second, raising the cap would be combined with capping the benefits. Nobody loses out on their benefits, but they stop accruing after a certain annual income (say, $90,000), indexed to inflation. Alternatively (and nearly equivalently, though more fairly), all income counts toward one's eventual entitlement, up to a lifetime maximum.
Third, the government gives up some of the more irresponsible tax cuts in return for paying more money into the S.S. trust fund. This is a bit of prestidigitation -- the government actually borrows from the trust fund rather than paying into it. But putting the government's finances in order would give us greater flexibility in the future, should an actual S.S. crisis materialize.
2. Simplifying the system
The 12.4% tax on earnings is eliminated entirely, or at least the half for which the wage earner is responsible. The S.S. trust fund is similarly eliminated as an accounting entity, although all present entitlements (and future entirements that would have been accrued) are paid directly out of the general fund. To make up for the revenue lost from the earnings tax, income tax rates are increased to be revenue-neutral. This is very progressive because it has the advantage of taxing investment income as well as earned income. And the amount by which income tax brackets would have to be raised would be far less than 6%, so the average person comes out ahead. (Does anyone know a good resource where I could calculate what the income tax rate hike would have to be to generate the same revenue?) Tax brackets could also be raised in a progressive manner so as not to hurt the average retiree living entirely off of interest and investment income.
This option is far more progressive than option 1, although it could never happen because it would hurt the rich, who wield all political power. And it would probably get awful press in the mainstream media, who would parrot all sorts of mischaracterizations of the plan by those opposed to it. But it would be a real net gain for most people. If only the progressives were as good at getting their message out as the archconservatives....
If personal accounts were introduced, the administrative costs of Social Security would go up (a lot)! Also, isn't it kind of misssing the point? I thought the original idea wasn't to be "fair", but so retired people wouldn't have to eat dog food. If Social Security is supposed to be like a safety net, it doesn't make sense to require people to make good investment decisions (about their personal accounts). No matter how much investment guidance is provided, someone will always make the wrong choices, or just be unlucky (oops, we lost your paperwork/database entry/etc., sorry).
Eric, you say that Social Security has a greater effect on people with lower incomes. But then you suggest a national sales tax? Sales taxes affect poor people the most, because they spend such a large percentage of their income on necessary items -- like food.
Private accounts are a horrible idea. If there are any choices as to how to invest money, half of Americans will choose worse than average. Just look at mutual funds -- all that talent running the funds, and yet many (sometimes most) do worse (sometimes far worse) than the S&P 500. How much worse will the typical uneducated, uninterested investor do?
The stock market is essentially a zero-sum game where the sum slowly increases because many corporations create wealth. Stock market gains are only sustainable to the extent at which they keep pace with that growth. But supply and demand on individual issues create winners and losers. When it gets out of control, a bubble forms, and money gets redistributed from late arrivers to those that got there early and get out at the right time. In essence, it can devolve into a pyramid scheme. If you suddenly dump a huge amount of money into the stock market as with private S.S. accounts, I guarantee that the losers will be primarily average investors.
However, I disagree with the statement that S.S. in unsustainable. There's always a tax rate that can sustain S.S. benefits. It's a multivariate function dependent on retirement benefit amounts, the retirement age, the GDP, the demographic profile, etc. As the independent variables change, the tax rate may have to change as well. But it's a lot easier to adjust that rate if you do away with the whole payroll tax system and instead treat S.S. benefits as any other government expenditure.
The real issue is that the current Congress/President has engaged in profligate spending. I believe that the tax rate required to pull in the revenue to meet S.S. benefit obligations isn't unreasonable if you have a balanced budget and a low national debt. But this administration has built such huge deficits that that tax rate would have to be a lot higher. This is one of the reasons I hate the current Republican party with a passion. They've abandoned fiscal responsibility in favour of a Grover Norquist approach to government whose eventual goal is the dismantling of social programs. It's class warfare that's great for the rich but sucks for everyone else.
Option 1. Do nothing. The Social Security system is not in crisis, yet. The S.S. surplus is not going to run out for another 30 years or so, I believe. At which point it becomes like just any other government program today: running on deficit. And deficit spending, despite much hand wringing from economists (including Mr. "Tax cuts for everyone!" Greenspan), does not appear to worry the average American voter. So instead of S.S. subsidizing other spending (yup, there's a chuck of my retirement in that B2 stealth bomber. hope it's got good resale.) other spending will have to subsidize S.S., which may not even be a bad thing. Yeah things like NIH, NSF, education and environment will suffer, but they're small potatoes compared to the defense budget, for example. So some of the big items will definitely be cut. The pressure on the government will force us to become more efficient and frugal in our national spending.
Option 2. Do something. Ok, #1's got a snowcone's chance in heck. I agree with Vincent that getting rid of the payroll tax is probably the right move. S.S. and Medicare are government obligations just like defense and education. I'm not saying that philosophically they should be. Obviously the government can do more or less. But since we've traveled down the S.S. road for so long and have already taken money "up front," there is no way to get off this particular wagon. So it's just another thing that the government has to pay for, why should it be held to a higher standard of funding than anything else? Getting rid of the payroll tax and raising the income tax will automatically get rid of the current rate cap. Making S.S. and Medicare come out of general revenue will actually give us a clearer view of the country's financial shape and make it harder to cook the books and run up wild deficits. Oh, yeah, we should index the retirement age to the average life expectancy as well. If people are gonna live until 120, I don't think they should spend 55 years in retirement. Especially considering people aren't that productive even when working. :)
Option 3. Pretend to do something. #2 has almost no chance also. So let's try some random stuff and call it a day. This is where most of the proposals fall. Cutting benefits, private accounts, raising payroll taxes. These are all band-aids on a decapitation wound. Sooner or later the issue will come back because the root problem isn't money, it's man/woman-power. I share Eric's worry about the decreasing ratio of working people to retirees. We're either going to have have really good robots by 2030 or we'll have to encourage immigration like some of the European countries are doing now. But there'd still be a shortage of doctors and other professionals. Japan and China are having it even worse since they have higher ratios of old to young.
We really need to stop pretending that S.S. is a mandatory savings plan and that what you get out is going to be what you put in. It's a government obligation because we as a civilized society don't want to just ship our aging citizens to the woods and let the bears take care of them. We should tax just enough to take care of those who can't take care of themselves and not make a whole big "entitlement" out of it. Let's face it, if you're a high earner and you're responsible with your money, you're gonna end up subsidizing the less fortunate/able/hard working as you are now. Unless as a country we're willing to bring back the Dickensian poor houses and debter's prisons, the rich and the able are going to get shafted. But I don't think you'll find anyone in the top tax bracket, no matter how much they feel they're overtaxed, who is willing to swap places with someone from the bottom tax bracket. All we can do is decide what we're willing to do for our fellow human beings. That and get cracking on building those robots.
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