Friday, March 04, 2005

Be Careful What You Wish for

There seems to be a number of indications now that President Bush's Social Security reform plan is DOA. Republican Congressmen are dropping hints right and left that they are unwilling to support Bush's plan in its current manifestation. Plus, we have Treasury Secretary John Snow basically giving away the store.

Treasury Secretary John W. Snow indicated Wednesday that the White House would accept a Social Security overhaul that does not divert the program’s payroll taxes into personal retirement accounts, a major shift in the administration’s position.
So -- time to pop the champagne, no? Well, not quite yet.

Some time ago Kevin Drum was wondering what the administration was doing supporting such a legislative turkey.
But here's the funny thing: surely Karl Rove knows [that Social Security reform is a loser]? Unless I'm missing something, it seems like a no brainer. So what's the point?...

What's the point of loudly pushing a proposal you're going to lose? What's behind it all?
Kevin then directs us to Ed Kilgore, who has an interesting hypothesis.
You have to wonder if the purpose, if only the fallback purpose, of the Bush SocSec campaign is to suddenly shift the debate from personal retirement savings accounts financed by payroll taxes to personal general savings accounts stuffed with sheltered upper-crust investment income. If there's any chance of that, Democrats needs to start preparing for it.

According to Ed, it's a "bait-and-switch." It remains to be seen whether or not the switch is for general savings accounts, but there are unquestionably areas where the Democrats have become vulnerable to the course of this debate. And if this has been, or is quickly becoming, a diversionary tactic, we are quickly approaching the moment when the administration's strategy will shift. Therefore, whether this was planned or not, it behooves us to examine possible weaknesses in our flanks.

Many Democrats, stung by the criticism that they were obstructing the common man from benefiting from the high rates of return available in the stock market, have repeatedly claimed a willingness to support private accounts as "add-ons" to Social Security's guaranteed benefits. This makes sense as a matter of immediate politics, but as a matter of policy, the devil is in the details.

So you have to ask yourself, "where does the money come from for add-ons?" Well, there are really only two choices. First, it can come from revenue generated via an increase in the payroll tax, by raising either the rate, the cap, or both. Of course, there isn't going to be a whole lot of Republican support for such an idea, so this source is a political nonstarter. However, even if support for tax increases could be garnered, these aren't policies that Democrats should be supporting.

As we all know, the payroll cap means that wage income above $90,000 is taxed. Therefore, if the add-ons are funded by increasing the tax rate, they will essentially function as a forced investment plan for wage earners (i.e. labor). And since returns from these accounts would not be guaranteed, the compulsory investments would be accompanied by the compulsory adoption of risk. I suppose that an argument can be made that personal savings in this country are too low and that wage earners should save more than they do. That said, forcing this kind of investment assumes that people have money in their budgets that they could be saving, but are blowing on coke and whores instead. I seriously question whether or not this is true for most of the people paying the payroll tax -- and especially those near the bottom of the ladder. For many this money will come out of wages already stretched to the breaking point -- and that isn't good policy or politics.

You could also raise the cap on payroll taxes to fund add-ons, but that is problematic for different reasons, which I will address below.

Now, if add-ons aren't being funded by increased taxes, they're being funded by voluntary individual contributions. Another name for this is a general savings account and that is exactly what Ed Kilgore was talking about above. It's a way of providing more tax sheltering opportunities for those who have savings above the limits covering existing tax shelters -- more tax cuts for the wealthy (sound familiar). So, I can definitely see why Republicans would support add-ons so funded, but no Democrat should have any part of it.

The other thing to keep in mind with regard to add-ons is making sure that it actually adds on. Bob Somerby raised the issue earlier this week.

First, a point of simple logic—an “add-on” account is only “added on” if traditional Social Security is fully preserved before the “adding” is done. After all, if future SS benefits are cut, then any additional savings account isn’t an “add-on”—it’s a replacement for the lost benefits. In short, before “add-on” savings accounts make sense, Congress will have to solve future funding problems with traditional Social Security.

It's true that Social Security's long-term funding problems are of questionable severity and therefore it's reasonable to wonder whether add-ons could be supported without acquiescing to demands for benefit cuts. However, I don't know how Republicans could accept a compromise that doesn't address what they claim is the central issue, Social Security's insolvency. I mean, at that point it isn't even Social Security reform anymore. Clearly, add-ons are a mere bargaining chip designed to enable the government to default on its Social Security obligations. And since the funding issues negate the value of having private accounts at add-ons, this isn't a bargain we should be making.

The other big concession that Democrats have been looking for is the option to raise or lift the cap on the payroll tax. This has been raised as a solution to Social Security's theoretical insolvency, but could also be used to fund add-on accounts (although it's important to note that it can't do both). There are two reasons this is a bad idea. Mark Schmitt encapsulates the first one very nicely.

…the basic argument is that the payroll tax is not a tax so much as a premium in a system of insurance. And the cap ensures that the insurance policy is basically a good deal for everyone. That's always been the bedrock of its political success. You might be able to get a better deal, in exchange for more risk, through private accounts. But no matter how you cut it, in general Social Security is a net plus for almost everyone, whether through retirement or survivors benefits. On the other hand, if you lift the cap, and people who make $120,000 are paying almost $15,000 a year in FICA taxes (including the employers' share), they would start to see it as a very bad deal. They would have to be alive and retired for almost as long as they were working in order to see a positive return.

So, even though lifting the cap would make Social Security more progressive, it would also make it less popular in the high wage earner demographic and therefore undermine its long-term political solvency. This is especially true when you consider Mark's second point.

The second point is that viewed as a tax rather than an insurance premium, it's a bad tax. Lifting the cap makes it slightly more progressive, but not much. It's an ugly regressive tax that applies only to work, not to investment income…

Politically, the system is successful because, as insurance systems go, it's a pretty good deal for almost everyone is paying into it. Making it more progressive turns it into an entitlement that is funded by the middle class. They are likely to resent shouldering the burden while the super wealthy get off scot-free. So, even though I can see why Republicans would want to foster this sort of resentment, Democrats shouldn't allow it to happen, especially with so little in return.

Besides which, all this talk about closing the funding gap through some sort of payroll tax manipulation ignores the distinctly unfair nature of such a proposition. Remember, we didn't wake up yesterday and discover that there was going to be a funding shortfall when the baby boomers started to retire. In 1983, we raised the payroll tax in order to build up a surplus to address this demographic issue. So, wage earners have already paid to fix this problem once. Regrettably, the funding surplus was used to obscure the actual size of our national debt, and thus justify spending increases and tax cuts that would otherwise have been seen as financially irresponsible. Therefore, the first place we should go for that money is to those who have been receiving the benefits of all George Bush's tax cuts, those at the upper income levels. Money was essentially taken from wage earners and given directly to the wealthiest among us. Any corrections to the system should begin with the repayment of this debt.

The bottom line is that both of these compromise positions, add-on accounts and raising the payroll tax cap, are dubious accomplishments for the left. No long-term progressive goals are achieved, while they allow the right to move forward their agenda, if only slightly. Therefore, this isn't the time or the place for an olive branch. If changes can't be made on our terms, I see no reason to change at all. There may be merit in some sort of a compromise on some aspect of this deal. But if we are going to give something up, let's make sure we get something we actually want in return.

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