Speaking the unspeakable

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When Alan Greenspan recently revealed unpleasant truths about Social Security, he was widely misinterpreted as having merely recommended cuts in retirement benefits, as though this was simply his personal preference.

What Mr. Greenspan really did was warn younger workers that, in the absence of serious reform, they will end up paying much more for Social Security and getting much less.

Social Security trustees estimate the population age 65 or older will more than double by 2035, reaching 75 million, while the population under 65 will grow only 15 percent. That is why Social Security and Medicare threaten, as Mr. Greenspan said, to "place enormous demands on our nation's resources -- demands we almost surely will be unable to meet." Raising future tax rates would just encourage even more seniors (and youngsters, too) to drop out of the labor force and thus stop paying Social Security, Medicare and income taxes.

Mr. Greenspan noted federal outlays for Social Security and Medicare are projected increasing from less than 7 percent of gross domestic product today to 12 percent by 2030. Just the increase alone -- 5 percent of GDP -- is nearly two-thirds as much as the Internal Revenue Service normally collects from the individual income tax (about 8 percent of GDP).

Beltway pundits reacted with denial and deception. Washington Post columnist E.J. Dionne wrote Democrats should be "grateful to Greenspan" for "speaking the unspeakable: Sustaining the tax cuts that President Bush has pushed through will require cuts in Social Security." Mr. Dionne's comment was a rhetorical shell game; he quickly slipped the pea beneath a different shell, hoping you wouldn't notice.

Social Security is supposed to be financed from the Social Security tax. President Bush did not cut the Social Security tax. So how can lower income tax rates today be blamed for lower Social Security benefits in the future? This makes no sense unless those grateful Democrats plan on bailing out Social Security with much higher tax rates on individual income.

If that is their secret plan, they should say so. But it won't work. It would require debilitating tax increases -- 5 percent of GDP. For Mr. Dionne and others to pretend such huge sums could be raised by merely repealing a few "high income" tax cuts is irresponsible nonsense.

In a recent Brookings Institution volume, Henry Aaron, Bill Gale and Peter Orszag echo Democratic presidential hopefuls by proposing to reverse 2001 income tax changes "that benefit high-income filers." But "high-income" turns out to mean "the top four marginal tax rates" -- all earnings above $29,050.

Yet even with this monastic definition of affluence, their static revenue estimate from raising all four tax rates is a trivial 0.4 percent of GDP in 2014. Errors in estimating the current year's budget deficit are often larger than that. The estimated loot from raising the dividend tax to 39.6 percent and the capital gains tax to 20 percent is just 0.2 percent of GDP.