Posted on 05/12/2005 12:50:45 PM PDT by rob777
Here is the grand strategy at the White House on Social Security: Propose a cut in future promised Social Security benefits for the middle class as well as for upper income workers. That will lead enough Democrats to support personal accounts to enable the entire plan to pass.
I know that sounds preposterous. That is because it is. But that has been the misbegotten "strategic thinking" at the White House for a long time now.
So in his press conference last week the President proposed benefit cuts for middle-class and upper-income workers through "progressive price indexing," an idea suggested by Democratic Massachusetts mutual fund executive Robert Pozen. Here is how that works.
Declining Returns
Under current law, while a worker is working, the future benefits he is to receive from Social Security increase at the rate of growth of wages in the economy each year. Under progressive price indexing, this remains the same for workers earning less than $25,000 per year, so there is no cut in future benefits for them. But for workers earning over $113,000 per year, their future benefits would grow only at the rate of growth of prices. For workers earning between $25,000 and $113,000 each year, their future benefits would grow at a rate between wages and prices, shifting more towards prices the higher the worker's income grows.
In other words, future promised benefits would be cut for workers earning over $25,000 per year, with benefits cut more the higher the worker's income. According to the Social Security Administration's analysis of the Pozen Plan a worker making $36,507 would see his benefit drop by 6% by 2025, 16% by 2045, and 28% by 2075.
A key additional factor is that Social Security taxes assessed through the payroll tax grow with wages over time. If benefits grow more slowly than wages, as they would under this proposal for everyone earning over $25,000 per year, the rate of return paid by Social Security for these workers would decline every year in perpetuity as taxes would grow faster than benefits each year.
The rate of return promised by Social Security under the current wage-indexed system is already well below market returns. Under the above price-indexing system, all workers earning over $25,000 per year would eventually be pushed down into a negative real rate of return, with the return becoming more negative each year. This makes the current problems with Social Security worse, not better.
In addition, workers' incomes grow each year. If benefits grow more slowly than wages, then the replacement rate, or percent of pre-retirement income paid by Social Security, would decline each and every year in perpetuity as well.
Currently, Social Security replaces about 40% of pre-retirement income, and with wage indexing that would remain stable over time. But under progressive price indexing, that would slowly be reduced year after year for all workers earning over $25,000 per year, until only 20% of pre-retirement income is replaced, then 10%, then eventually 5%, etc.
How is proposing this plan going to move Democrats to support real personal accounts, with the accounts substituting for the current Social Security system over time? It won't. Quite to the contrary, as reported in the Wall Street Journal on May 4, "In both chambers, Democratic lawmakers insist Mr. Bush has strengthened their position by embracing an approach that would reduce promised Social Security benefits for seven in 10 Social Security recipients. 'There is no seat that Democrats are going to lose because we stand up for the principle of guaranteed benefits,' says Rahm Emanuel of Illinois, who is chairman of the party's campaign committee."
Rather than leading to personal accounts, this proposal is going to lead, at most, only to a tax increase and no real personal accounts--or to no reform at all. The Democrats will never accept a plan that tries to eliminate the Social Security deficit solely through future benefit cuts. They will insist the plan has to include a balance of tax increases and benefit cuts. Moreover, the Democrats have already insisted they will not support any plan with real personal accounts that substitute for part of the current system. So they will insist on dropping those accounts as the price for their support for any package of tax increases and benefit cuts.
This is already playing out. The Wall Street Journal also reported on May 4 that "Senate Republicans are considering seeking passage of a Social Security bill that abandons private accounts in favor of simply shoring up the program's long term solvency through approaches such as the one Mr. Bush has embraced." On May 2, Robert Pozen, author of the progressive price-indexing plan, proposed in a Wall Street Journal op-ed a compromise with Democrats. It would include his proposal for progressive price indexing, plus a tax increase adding a surcharge of 2.9% of wage income for all workers earning over $90,000 a year, with the opportunity to put some of that money in an add-on account on top of Social Security.
More likely, with the reform effort lost in the swamps of benefit cuts and tax increases, nothing will pass at all. Democrats will then campaign next year arguing that they saved the middle class from draconian future benefit cuts and that the whole episode shows why more Democrats are needed in Congress to save the country from these crazy Republican plans.
In 1985, the Republican Senate passed a modest adjustment of the Social Security COLA, which never passed the House. In 1986, Democrat challengers ran ad after ad against Republican senators who had voted for the COLA change. The Republicans lost eight Senate seats and majority control. Progressive price indexing is a thousand times more severe than the COLA adjustment the Senate passed in 1985.
So the White House's confused Social Security strategy threatens the Republican majorities in Congress. If those are lost, that will devastate conservatives across the board on issue after issue, from abortion to gun control to taxes to national defense.
Moreover, this confused strategy is fumbling away President Bush's incredibly brave support for personal accounts through two successful elections. Ideologically, personal accounts are the jackpot for conservatives, for they hold the potential for the greatest reduction in taxes and government spending in world history through shifting responsibility for financing and paying retirement benefits from government to the capital markets. A frontal assault trying to cut future promised benefits could never accomplish nearly as much, and would probably, as discussed, backfire.
Ryan-Sununu
Instead of this folly, a promising alternative would be to use the short-term Social Security surpluses to finance as large a proportion as possible of the 6.4-point personal accounts proposed by Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.)--with no tax increases or benefit cuts. This could be backed with the highly popular theme of stopping the raid on the Social Security trust fund to finance other government spending. Later, we could then advocate expanding the accounts to the full Ryan-Sununu level, which would both achieve permanent solvency for Social Security and provide workers with a much better deal than the current system.
Republicans have already run in dozens of races with the issue framed as the Ryan-Sununu proposal frames it, and they have won every single one. This approach allows us to focus on the populist positives of personal accounts, which have been lost in the fog of numerous highly unpopular benefit-cut and tax-increase ideas. Personal accounts are controversial enough as it is. The idea can't be burdened with tax increases and benefit cuts.
If the White House would change course and just dance with what brung em, glorious victory can still be snared from the jaws of defeat.
Time for a change in strategy. No more "Democratic Lite" proposals.
As a supporter of the Fair-Tax it is first necessary to remove any pretense of there being a tie between what an individual contributes to Social Security and benefits received. The Fair-Tax does not tax income or record how much specific taxpayers contribute.
I support the Fair Tax as well, but also like the User Fee idea for a number of services. We have to ween ourselves of the notion that we are automatically entitled to benefits that are the fruit of someone elses labor.
The best way out of this mess is to cut benefits for the wealthy, abolish the regressive payroll tax, and fund SS payments out of general revenue (thereby dispensing with the myth that we have "accounts" in the current system). I'm not a big fan of private accounts for the same reason as school vouchers; they could easily end up giving the government greatly expanded control of the economy. For example, there would be tremendous pressure for the government to grant favorable treatment to companies that are strongly represented in government-approved funds.
Means testing, whether via progressive indexing or something else, makes perfect sense.
I disagree, it is not the role of government to engage in wealth redistribution, but merely to admister justice. Blind Justice means not discriminating on ANY basis, including income. Government is corrupted when such social functions are transferred from the private sector to the public sector. (Not to mentioned that those institutions in the private sector, which are more suited to such roles, are squeezed out as their role is usurped)
I favor a gradual privatization of most of what the governemnt does. The first step is to disabuse ourselves of the notion that it is the proper role of government to engage in wealth redistribution.
"Means testing, whether via progressive indexing or something else, makes perfect sense. As I've said numerous times, there is no reason why a 20 year old burger flipper should have 15% of his paycheck confiscated and handed to Warren Buffet. Not only is this welfare for the rich, it prevents low-income workers from accumulating savings of their own, continuing the cycle of dependency, which Democrats love since it gets them votes."
I disagree! Vehemently! There isn't a more asinine approach to the Social Security problem than instituting any sort of "means testing", or "progressive benefit reduction", or anything else that enshrines the idea that our productive people, whether Warren Buffett or anyone else, should be expected to forcibly pay into a supposedly universal benefit system, like Social Security, for their entire working lives, only to be disqualified from collecting any benefits at the back end, thereby relinquishing their lifelong investment, and so funding someone else's cushy retirement, likely someone who didn't have the sense to put money away on their own in the first place. I will be against this on general principle! And so should any self-respecting citizen who values freedom. "Means testing" is nothing less than chattel slavery!
Social Security should not be a universal benefit system. It should be a safety net for those who need it. Let the rest of us out so we can provide for ourselves.
thereby relinquishing their lifelong investment
Social Security payments aren't investments, they're just taxes. You have no more reason to get back what you put in than you do of getting your income taxes back.
"Means testing" is nothing less than chattel slavery!
Then so is any other welfare program, including Social Security in its present form. Look, I don't like government redistribution of wealth any more than you do. But *sometimes* it's a necessary evil, when there are people who would otherwise not be able to support themselves (and not necessarily through any fault of their own). I support limiting such redistribution to those truly needy cases, thereby minimizing the amount that government has to confiscate from productive citizens.
"Social Security payments aren't investments, they're just taxes. You have no more reason to get back what you put in than you do of getting your income taxes back."
I swear. I don't get people who make this argument.
So what? I've been paying into this thing for over forty years. And I'm not talking trivial dollars here, either! And I'm just supposed to write off these losses blithely and move on, at this late date, so the goddam government can continue in their ages old screw job of taking money from the productive people and giving it away to the "poor"?
I would probably be fine, financially, if I didn't get Social Security. But that's not the point. The point is, I've worked my fingers to the bone, salted away some money through personal sacrifice and hard labor, and saved enough to make my retirement a little easier and less shaky. All the while I've seen my contemporaries party down, get into hock up to their eyeballs keeping up with the Joneses, buying big houses, motorcycles, and boats, going fishing and hunting, and generally having a grand old time rolling up their debt and not saving a dime. Knowing this, anybody who tells me that I should be magnanimous with these shiftless bums by losing all of the money I've got tied up in Social Security so they can skate while I steam and smolder in rage at the injustice of it all is just plain nuts!
I've said this before. If the Republicans insist on this "means testing" bulls**t, they will suffer very heavy losses indeed at the polls. Count on it!
The alternative is a tax increase.
Is that your recommendation?
"The alternative is a tax increase. Is that your recommendation?"
The alternative is implementing PSAs, with no tax increases or "means testing". Let younger workers derive the benefits of long-term investments for their future retirement through PSAs by letting them opt out of social security in the long run. And let the older workers collect the benefits they've already been forced to pay for. But no "means testing" bulls**t! Anyone with a brain knows what this means. Those people who've worked hard and planned wisely will get screwed out of their "contributions" and those who've been slackers will get over on the rest of us. This is just fundamentally wrong!
Agreed: personal accounts are the only way to "save" Social Security (and, at the same time, dismantle it).
Well I don't get people who don't understand it, so we're even :)
So what? I've been paying into this thing for over forty years. And I'm not talking trivial dollars here, either! And I'm just supposed to write off these losses blithely and move on, at this late date
Any changes would be phased in over many years, because you're right that it would be unfair to tell you today that your benefits will be cut sharply with little time to alter your financial plans. So yeah, you in fact would get most or all of what you were promised. But younger workers should be told that they need to save for themselves if they expect anything beyond a minimal standard of living in retirement. Private accounts are one way of doing this, but it's even easier to just abolish the payroll tax completely and let workers use that money as they see fit.
"Private accounts are one way of doing this, but it's even easier to just abolish the payroll tax completely and let workers use that money as they see fit."
I agree with you on this point. But although it may be easier and more sensible to abolish the payroll tax and let people fund their own retirement, it isn't likely to happen. PSAs are the only viable solution here. Its like school taxes. The easiest and fairest thing would be to let people who have kids and need schools pay the freight. But, instead of this, we have debates about school vouchers, because the people of this country aren't willing to accept a fully private school system.
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