Now is Not the Time for Social Security Reform

By Mimikatz

The rumors that Bush is willing to consider tax increases on upper income people to make progress on issues he views as important to his legacy gained credence yesterday.  In his press conference yesterday Bush as much as said so, per the WaPo:

Signaling a new flexibility on issues in the wake of the Democrats' wins, Bush said he is willing to discuss Democratic ideas for solving the Social Security problem, including tax increases. "I don't see how you can move forward without people feeling comfortable about putting ideas on the table," Bush said when asked about the prospect of tax increases to keep Social Security solvent. "I have made it clear that I have a way forward that can do it [without raising taxes] and I want to hear other people's opinions."

The deals most often talked about to secure Social Security's finances would combine an increase in the level of salaries subject to the payroll tax, set to rise to $97,500 next year, with some shrinkage of benefits for those retiring in a few years, either by way of increasing the age of retirement (with full benefits), now 67 for those born in 1960 or later, which also reduces the initial benefit for those who begin to draw benefits at age 62, or by so-called "progressive indexing," which ties the calculation of initial benefits to the rate of inflation, rather than to wage increases, ultimately resulting in a lower initial benefit for workers who make more than $25,000 a year (in today's dollars) at retirement.   

In the last two years the focus has been on Bush's insistence on private accounts.  Dems refused to even discuss the topic of changing Social Security so long as private accounts, funded by some percentage of payroll taxes, was on the table.  But even if Bush takes carve-out private accounts off the table, and agrees to consider increases in the payroll tax as part of a deal, Dems should still decline the invitation to tinker with this highly successful program.  Why?  Because so long as payroll taxes exceed benefits paid, which they will until at least 2017 under the current system,  and as long as Bush insists the Social Security Trust Fund is a phantom, any increases in payroll taxes will just fund the war and tax cuts for the very rich. They will not put Social Security on a sounder financial footing than it is now because there is no real mechanism to ensure that result.

In fact, increasing the salary cap now along with some reduction in benefits for those who retire in 10 years or later would actually exacerbate Social Security's future, because the tax revenue would be spent now (or used to offset the burgeoning deficit), while the reduction in outlays would not be felt for 10 years.  It would also allow Bush to pose as fiscally responsible while at the same time preserving his tax cuts for the very rich.  In fact, extending Bush's tax cuts will cost the Treasury three times as much as the projected Social Security shortfall.  It is the tax system, not Social Security, that needs reforming.

Moreover, an increase in salaries subject to the payroll tax will disproportionately hit the well-off, those with salaries above $97,500, but not the rich.  Particularly if the phase-in is steep or even non-existent, those highly paid salaried workers will experience an immediate increase in their marginal tax rate of 6.2% on income between $97,500 and $125,000 or $150,000 or wherever the new cap is set, raising their marginal rates to nearly the top rate of 35%.  By contrast, the very rich get most of their income through dividends and capital gains, which are taxed at 15%, and actually pay an effective tax rate well below what the merely well-off pay.

In short, if Bush is floating a deal that would eschew private accounts but involve an increase now in payroll taxes by upper income workers and some reduction in benefits down the road, the Dems should stand firm against it.  The real culprit here is Bush's tax policies, his tax cuts for the rich, particularly the reduced rates on investment income, lowering the top rates to 35% and proposed elimination of the estate tax.  It is these cuts which, if made permanent, will preclude us from adequately funding the Boomers' retirement when and if the system really does begin to run low in the 2040's.

And if we really want to tackle a problem whose effects will be felt decades from now, let's start with global warming instead.

Full disclosure:  I am a Social Security recipient, my income is not subject to payroll taxes, and I certainly expect to be dead by 2040. 

Comments

[301]

It can only be explained that this is what Congress is doing by sending CIA to DOD.

More jobs, more money, more control.

[Mimikatz]

I do understand about the trust Fund, that the SS surplus is invested in special Treasury Bonds that the Treasury has promised will be redeemed when due. They will then be rolled over with new borrowing, however, not paid out as would happen when a private person's T-bond comes due. That new borrowing will only be possible if the cumulative national debt is at least somewhat under control. Right now the SS surplus is used to mask the size of federal deficits.

[John Lopresti]

We may live beyond 2040; email me in 2039.

Add the trade deficit with China to the war cost, the combined drain from the US economy is greater than the social security shortfall. Instead of addressing these, Republicans, as they usually do, are looking for ways to balance the economy on the backs of the poor.

Bush still wants to implement the Republican fictitious economic theory about balanced budget; I see his goal as an attempt to use some of the 'limited' adjustment rooom in the balanced budget theory by asking now for social security reform, while he still has a substantial minority in Congress. We need another election to open our options, unless Reid and Pelosi quickly develop a constituency. It is too early to assess that strategic opposition; and that is a reason why Bush wants holiday headlines about how compassionately Republicans want to revise social safetynet programs. Ask Medicare donut elders how fair Republicans want to treat the aged. Old people on maintenance pharmaceuticals have a ceiling beyond which they must delve into savings, or else halt their prescriptions, until the next calendar threshold is reached or until they spend precious fixed income dollars beyond the donut rim, at which point Medicaid again becomes available.

A funny irony is about to dawn on Republicans, however; the new crop of seniors are the social experimenters; well, maybe to be fair it is simply modern living and fairly mundane, but I liked the recenty published statistic that among people born in the 1940s more than eight in ten have enjoyed an experimental marriage out of wedlock by age 44; later generations are yet more 'liberal' than that, though I think 'liberal' is applied to this phenomenon based on a paucity of other more colorful and precise designations.

Bush2 wants to be a decider of important issues. And sociial security restructuring is one such part of our lives and the economy. I would like to watch Bernanke a while more before leaping into social security reform. That, and there are lots of Republicans facing eleciton in 2008. I agree, MK, it is time to wait. Let's see what Bush2's proposal actually is. I recall what his suggestions were at the last minute for prisoner abuse regulations, and wiretap secrecy. And in a few weeks we start to hear people in the spy scandal in a trial. We have time as events unfold. Let's see what the character of the 110th congress is.

[Redshift]

I don't think it's a good idea to let Bush at Social Security in any form, for the reasons you've stated. But if one were foolish enough to do so, at minimum, I think any smart Democrat should also look for some indication that Bush can be trusted (as in, actualy compromise on some other disagreement) before going anywhere near Social Security.

By putting "including tax increases" in his initial proposals for compromise, it's clear the Bush wants to demonstrate the GOP talking point that Democrats want to raise your taxes, and avoid the truth that he's made it necessary to raise taxes. I smell a replay of the Homeland Security debacle here -- appear to give in to your opponents because you've figured out a way to use it to screw with them.

[Mimikatz]

John: I don't expect to be here in 2040, as I would be 98, and that is older than I want or expect to live. But I expect most people here will be around.

The proposals being floated aren't balancing SS on the backs of the poor. They (at least those who will get SS) won't have their benefits reduced. He is evidently proposing to balance it on the backs of upper income salaried people, making up to $250,000 or so, when the people who have profitted so handsomely from his policies are the very rich, with incomes over $500,000, mostly WAY over that level. people with million plus incomes. Raising taxes on the $97,500 to $250,000 group looks like raising taxes on upper income people, because it hits the bottom of the top 5% income people, but it leaves the top 1% who have the highest incomes, essentially untouched.

[Semanticleo]

"any increases in payroll taxes will just fund the war and tax cuts for the very rich."

I disagree. By simply removing the cap from payroll tax deductions you unravel the Conservative strategy(Reagan on) of replacing the burden of Fed withholding and quarterly pmts from UNEARNED income (trust fund babies and such), to EARNED
income types (Joe Lunchbucket) via the payroll tax which, in most cases, exceeds FED deductions on each paycheck

[Sara]

I suspect Bush threw Social Security into the mix primarily because he wanted to eventually make the case that Democrats are not about adapting the system so as to protect it.

While he isn't in Congress any more, Martin Olav Sabo (Chair of Budget Committee, 1990-1994)offered a bill in the 109th Congress that deserves a good re-look. In essence he made the point that the failure of the Government to pay market rate interest or premiums on what it borrowed from the "Trust Fund" was the proximate cause of the possible SS deficit, and he put forward rules regarding such borrowing that the CBO scored as highly accurate -- Essentially let's stop making the SS Trust fund a very cheap piggy bank.

I am not certain this Democratic Congress can execute any significant reform -- but what it can do if it has a mind to, is make clear all of the built in deceits, frauds, dishonest accounting, incorporated in the various Budget Programs. (and loaning out SS trust funds way below market rate is just one of many such frauds.)

We should not buy any used car (old and failed or rejected Social Security Reform) from Bush -- but Maybe we can con him into some honest accounting. That would be the only basis on which any reform or change should ever be based.

You know if you ask the question -- what if the surplus generated from the 1983 Tip O'Neil and Reagan increase in FISA withholdings had generated market rate interest on loans to the General Fund over the years -- would we be looking at an out-years deficit? No Way.

So what we need is a tax policy that will recapture that lost interest on the Trust Fund loans from those who benefited from lower taxes, (and the lies that said it really was surplus, and thus tax cuts.)

[Mimikatz]

Semanticleo: No one is talking about removing the cap or applying it to anything other than wages and salaries. The talk is of raising the cap to $125,000 in one fell swoop or maybe to $150,000 or even to $250,000 in several stages, say over a decade. Otherwise, it goes up each year indexed to the increase in wages.

The other thing we could do to help SS is to stop piling on debt, that is, reduce the annual deficits, so that we have more borrowing capacity when we really need it, such as in a depression or even for retirement needs in the future.

But it is the Bush tax cuts that busted Bush's budgets. Up until then we weren't doing so bad, and even ran a surplus (that's including the SS surplus). I don't expect the Dems to touch anything that hasn't yet taken effect. Rather, they will let everything expire in 2009 if they hold Congress and win the Presidency. That is likely to be the theme in 2008--death (Iraq) and taxes. I like out chances on that terrain.

[freepatriot]

I wouldn't trust george bush as far as I could throw him (about 4 feet)

george bush has fucked up everything he has ever touched

if my congresscritter decides to listen to george bush about ANYTHING, I'll know it's time to find a new representative

my philosophy is simple:

If george bush says it, it's got to be a bad idea, or a lie designed to obfusicate on another subject

george bush is wrong on everything, and it's about time people began to realize that

[RickG]

The message to those who want to tinker yet again with the Social Security benefit system, is that they've had their bite(s) at the apple. In the 80's they implemented the annual increase in the income subject to the tax. In the 90's they implemented a series of increments to retirement age (with full benefits).

No more. No changes. Anyone who brings up the subject should be greeted with both barrels blazing!

[John Lopresti]

MK, In 2038 may be ok, i.e., to email a year earlier; there is a chance we may still be well, though environment and genetics are significant determinants. SemanticL and Sara see thru Bush's ploy. I favor rewarding achievers by graduated income tax, not the plundering politics which set economic castes against each other. In sum, I think Bush is drawing a map to channel congressional processes deliberating his suggestion, trying to take a page from the Democratic party social safetynet legislative handbook. I could relate my own eccentric views of how some pretty good programs were skewed by prior presidents and congresses as well; even the War on Poverty was mostly an insincere sop to quell unrest among one contingent in the then president's party. Bush's idea of reengineered social legislation is fairly clear; last time we went through one of these 'new ideas' of Bush's, the actuary who showed the proposal cost egregiously more than Bush had pencilled out, had reports suppressed and was removed from the office that wrote those evaluations. It is too soon for Bush and his 'proactive' architects to discern what they are to expect from the 110th congress. We can afford to be dilatory about all these administration proposals. Additionally, Bush's neoCon theorists are still writing signing statements; look at the one they wrote on the nuclear technology transfer with India; the administration still believes it has the bit in its teeth; that steed is going to slow a tad when the Libby trial commences Real Soon Now.