What Bush Must Do to Save Social Security Reform

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The Social Security Reform effort is in trouble. Before our eyes, it is being crushed by the weight of three fundamental flaws: one philosophical, one strategic, and one tactical. If any Social Security Reform worth having is to be enacted this year, these flaws must be addressed—and soon. It will do no good for the President and his men to take the existing incoherent mess on a 60-day cross-country sales tour. A high-profile push to sell the un-sellable and defend the indefensible will just make a bad situation worse.

The Philosophical Problem

Social Security reform has two important, but philosophically distinct, goals. One is to make the Social Security program financially sustainable the face of America’s changing demographics. The other is to help move America from a “welfare state” to an “ownership society”. By talking about personal accounts as if they were a solution to Social Security’s looming financial woes, the Bush Administration has created an intellectual incoherence for its enemies to pounce on. And pounce on it they have, with great effect (if the latest opinion polls are to be believed).

Social Security has financial problems because it has promised to pay out in benefits more than it expects to take in via payroll taxes. The magnitude of the gap can be expressed as the system’s “unfunded obligation”, which is currently estimated at $3.7 trillion over the next 75 years.

Given the way that Social Security benefits are currently structured, even rapid economic growth (which does wonders for the rest of government finances) has little impact on the System’s “unfunded obligation”. This is because promised benefits are tied to average wages, which rise as the economy grows. Accordingly, the only way that Social Security can be made solvent in the long term is by raising payroll taxes and/or cutting promised benefits.

Personal Social Security Accounts (PSAAs), while highly desirable for other reasons, are simply irrelevant to solving Social Security’s financial problems. By conflating the two issues and implying that PSSAs are, in fact, some kind of solution to the System’s “unfunded obligation”, the Administration has created an intellectual incoherence that its enemies are using to discredit the whole Social Security reform effort.

The Strategic Problem

You can never get more from any negotiation than your initial offer. The Administration’s Social Security reform proposal would allow workers to divert to PSSAs 4% of their current 6.2% Social Security tax, with a “cap” on contributions of $1000/year. Unfortunately, this plan is too small and too timid to generate much excitement. The proposal would not allow workers to accumulate real wealth, while the “cap” prevents Social Security reform from acting as an economic-growth-boosting cut in marginal tax rates.

The Democrats will attack any plan involving personal accounts with fear-mongering demagoguery. The plan must generate enough excitement to counteract this predictable assault. The Administration’s current plan doesn’t.

The Tactical Problem

President Bush’s suggestion that raising the “wage cap” on Social Security taxes was “on the table” was a breathtaking error in judgment. This one remark may, all by itself, have doomed the Social Security reform effort for this session of Congress. The reaction among Democrats, RINOs (Republicans In Name Only), and the Mainstream Media just serve to prove the old saying (that I just made up), “If you talk about raising taxes at all, soon all you can talk about is raising taxes.”

The Democrats’ “dream scenario” is for the Administration to persuade the public that action on Social Security financing is urgently needed, for the Republican plan to collapse under the weight of its timidity and intellectual incoherence, and then for a panicky “compromise” to emerge that raises taxes.

The Democrats are (justly) afraid of what another four years of 4%+ annual economic growth would do to their hopes for regaining power. They need to throw a monkey wrench into America’s economic engine. Because the current rapid economic growth was caused largely by cutting marginal tax rates on America’s highest earners by 5 percentage points (via the 2003 tax bill), the Democrats could not dream of a better “monkey wrench” than to eliminate the “cap” (currently $90,000 per year) on the wages subject to Social Security taxes.

Eliminating the wage cap would raise marginal tax rates on our most productive people by a full 12.4 percentage points and send the country into an economic tailspin. This would crash Federal revenues and cause the deficit to explode. The Democrat’s next move would be to exploit the resulting panic over the deficit to reverse the 2003 Bush tax cuts and raise marginal tax rates another 5 percentage points. At this point, they would have largely achieved their goal of turning dynamic America into something resembling stagnant (and geopolitically docile) Europe.

Where do we go from here?

To have any hope of getting Social Security reform back on track, the Administration must do three things:

1. Restore intellectual clarity to both it’s thinking regarding Social Security reform and its communications with the public.

2. Put forth a much more aggressive proposal that allows ordinary people to accumulate real wealth over their lifetimes and that promotes faster economic growth.

3. Publicly admit that the wage-cap “trial balloon” was a mistake, explain why raising marginal tax rates on top earners would be economically disastrous, and promise to veto any bill that raises taxes in any way.

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