- The Washington Times - Saturday, January 29, 2005

I recently began grading members of the chattering class for their wise or inane comments about how and why Social Security needs to be changed.

This ongoing project was facilitated by an Outlook section in The Washington Post that recruited “a variety of Social Security watchers” to comment on the topic. Predictably, most attacked the president’s approach, and one supported it. Given the respective merits of the two sides, that may be a fair fight.

Deluded denial: D-minus. The lead article by Mark Weisbrot and Dean Baker argued that since Social Security may not face a full-blown crisis until 2043, we might as well wait until 2042 before doing anything about it.

“The latest Social Security trustees’ report,” they write, “predicts that the Social Security program can pay all promised benefits for the next 38 years.” Yes, but that same report also says the government will have to either raise taxes or borrow the money to pay those benefits after 2018.

Meanwhile, the Social Security Web site warns a young questioner that, “When you reach age 63 in 2042, benefits for all retirees could be cut by 27 percent and could continue to be reduced every year thereafter.”

But what about the trust fund? The authors claim, “Those ‘pieces of paper’ are backed by the full faith and credit of the U.S. government.” Actually, the trust fund is not even pieces of paper —just nonmarketable bookkeeping entries saying one part of the government owes another part some money. Once Social Security begins paying out more in benefits than the Social Security tax brings in, that gap must be filled by higher taxes or increased budget deficits.

A Social Security Administration booklet on “The Future of Social Security” warns, “In about 30 years, there will be nearly twice as many older Americans as there are today. At the same time, the number of workers paying into Social Security per beneficiary will drop from 3.3 today to about 2.1 in 2031. These demographic changes will severely strain Social Security financing.”

Mr. Weisbrot and Mr. Baker admit that “Congress will at some point have to increase taxes or shave the benefits promised to future generations. But that’s no different from what’s been done before…. In other words, it’s a nonissue.”

Yet past benefit cuts and tax increases pale in comparison to what critics of the president’s efforts have in mind. “The Future of Social Security” notes that “eventually Social Security taxes would have to be raised by about 50 percent to pay for all benefits owed.” This is not a “nonissue” to young people faced with paying much higher taxes to send increasingly generous checks to old folks while inevitably offered only “shaved” benefits for themselves.

Forgetting fiscal frugality: D-plus. Larry Kotlikoff begins by warning of a $51 trillion “fiscal gap separating total projected federal expenditures… and total projected federal taxes.” Unfortunately, he treats “projected federal expenditures” as if they were realistic and untouchable — as though future generations really could or would allow the share of gross domestic product devoted to old-age subsidies to rise without limit. Having ruled out the slightest restraint in federal spending, Mr. Kotlikoff thereby offers us only a Hobson’s choice between overtaxing ourselves or our kids.

One choice, he says, would be “an immediate and permanent hike in both federal corporate and personal income taxes” amounting to “a whopping 78 percent.” Otherwise, he says, we will have to “double our kids’ net tax rates.”

Mr. Kotlikoff’s theme, “Don’t make the kids pay for our mess,” implies this generation could and should bear the burden of transfer payments to later generations. But that would be impossible. First, Social Security and Medicare benefits in 2030 and beyond will be financed from taxes collected at that time, not from taxes collected today. That is how “pay as you go” programs work.

Second, the reason Mr. Kotlikoff says we cannot double-tax rates on our kids is that they “would stop working, evade taxes and leave the country.” Yet that is the same reason we cannot more than double our own tax rates. If we tried it, our kids would simply inherit a smaller economy, one even less able to afford transfers from the few remaining overtaxed fools who work to the many who prefer to be subsidized.

Mr. Kotlikoff is wildly alarmed at the prospect of overtaxing workers in 2050, while Messrs. Weisbrot and Baker are absurdly sanguine. Yet none of these gentlemen will have anything to say about the tax burden in 2050 — because dead men don’t vote.

Mr. Kotlikoff also opined, “If our kids invest in a safe manner, they’ll be lucky to earn 2 percent after inflation.” He clearly needs help with his investments.

Taxing young people twice: D. Laura D’Andrea Tyson, former chairman of President Clinton’s Council of Economic Advisers, felt obliged to offer “a reform plan that Democrats could be proud of.” That apparently means a plan guaranteed to increase both taxes and spending.

Instead of allowing young people to devote some of their Social Security tax to their own personal account, Ms. Tyson proposes they pay the full tax and then some. The nostalgic may remember this “add-on” tax plan as “Social Security plus” — an idea proven less than irresistible by Al Gore.

“Contributions to these accounts would be voluntary,” says Ms. Tyson, “but would be encouraged by generous tax incentives and federal matching contributions to enable households of modest means to build adequate retirement savings.” Paid for how? Well, “general tax revenues would fund the incentives and grants used to foster Social Security-plus accounts.”

The fundamental problem is not incentive to save, but capacity to save. Young people typically earn only a third as much as they will when they reach middle age, so there is little left to save out of a modest paycheck after devoting 12.4 percent of it to Social Security. Ms. Tyson’s add-on does nothing to improve that household budget constraint, yet it could waste a lot of “general tax revenues” on a phony fix.

Her Taxes-Plus scheme tries to bribe young workers to pay twice. They would have to pay in full for some previous generation’s wine and cheese, but also pay extra for their own “add on” savings and “general revenues” to fund this circus.

Ms. Tyson claims that, in contrast to her idea of tossing general revenues at the problem, allowing individuals to “divert” some payroll taxes to private accounts “would create a real financing crisis, since these contributions are already committed to honoring the system’s entitlement benefits.”

Nonsense. Unlike her add-on scheme, those who choose to divert some of their payroll tax to a personal account would also collect a smaller Social Security benefit upon retiring The net cost would be much less, not more, than doing nothing. And anything that costs the government less cannot involve any added cost. With no cost, there is also no “transition” cost.

Why retire? B-plus. John Gomperts raised a neglected key point: “Those who continue working beyond normal retirement age continue to pay into the Social Security system. When they do eventually retire, they don’t get proportionally more in Social Security benefits. There’s little financial incentive to keep paying in at a time when they could start collecting.”

That is why I proposed workers be exempt from Social Security tax after age 65 in “Working Through Demographic Change” by William Zinke and Susan Tattershall.

All the talk about retiring in your 60s forgets that many people would rather keep working into their 70s if Social Security were not so biased against them. Social Security’s benefit formula is grossly biased in favor of those who work the fewest years. And Social Security’s lifelong tax is brutally biased against those who work the most years.

Come to think of it, the more closely you look at Social Security, the more unreasonable it looks. Maybe that’s why so few of The Washington Post’s favorite “Social Security watchers” dared look too closely.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.

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