Saturday, February 12, 2011

Social Security, Not Compromised

Could the White House finally be learning? Not likely but (CLICHE ALERT) hope springs eternal.

The Wall Street Journal reported on February 11

The White House last month considered offering specific benefit cuts and tax increases to shore up Social Security's finances, but ultimately decided to back off.

Officials weighed suggesting that Congress raise the ceiling on wages subject to the Social Security payroll tax and allow benefits to rise more slowly than under current law, according to three people familiar with the deliberations. The hope was to engage Republicans in talks.

But aides decided against putting forward the ideas, sure to be unpopular, without a clear signal from Republicans that they were ready to talk. As a result, the budget President Barack Obama will release Monday won't include any specific proposals to alter Social Security.

A proposal to raise the ceiling on wages subject to the Social Security payroll tax would be interpreted, accurately or otherwise, as a tax increase and thus be dead on arrival (another cliche) in a House controlled by Republicans. (It is, after all, a a party which cut taxes when fighting two wars it approved of. And put much of the cost off-budget.) Then it would support benefits to rise more slowly than at present, and blame the cut in benefits on Democrats wanting to (another cliche) pull the plug on Granny.

Of course, cutting benefits isn't necessary, anyway. Blogging on Ezra Klein's site in late June, Dylan Matthews explains that Janemarie Mulvey and Debra Whitman of the Congressional Research Service (report, in PDF, here)

looked at this question in 2008 by evaluating three different proposals. The first would raise the cap so that 90 percent of wages are taxed (CRS estimates this would mean a cap of $171,600 in 2006) and pay higher benefits to those affected; the second would eliminate the cap and pay higher benefits; and the third would eliminate the cap for taxes but would not increase benefits.

Matthews presents two graphs: the first, illustrating the impact of the proposals on the acuarial state of Social Security compared to the current course; the second, illustrating how much of the shortfall is eliminated by each proposal.

While all proposals, Matthews notes, "put a dent in the shortfall, completely eliminating the cap without increasing benefits actually creates a long-term surplus, and eliminating the cap while increasing benefits comes close."

Economist Robert Kuttner of Demos notes (report here, in PDF)

The shortfall in the accounts began appeared in the early 1980s because the 1970s turned out to be a dismal decade for wages, as well as a period of high inflation....

When the economy went back into recovery, wages never resumed their previous link to productivity growth. Only in the middle and late 1990s, when we experienced near-full employment did wage growth return to something close to its previous trend—and during that period Social Security’s projected finances improved dramatically. The simplest and most reliable cure for the modest short fall in the Social Security accounts would be to restore the historic link between the economy’s productivity growth and median wage growth.

We don't know, obviously, whether the link between increased productivity and wage growth will be restored, given the unholy alliance in the American political economy of Republicans and neo-liberals. Still, as Kuttner argues

Even if we cannot manage to increase median wage growth, a modest adjustment in the Social Security tax base would be sufficient to balance its accounts for the next 75 years. Historically, about 90 percent of wage income has been subject to Social Security tax. But as the income distribution has become more unequal, only about 83 percent of payroll is now subject to tax. High income earners are only taxed on the first $106,800 of their earnings. If we restore the tax base to its historic level, nearly half the shortfall disappears.

To give the Administration the credit I rarely do, this appears to be roughly what the President had in mind when, according to the WSJ

In the Social Security deliberations, the White House considered raising the ceiling, currently $106,800, on wages subject to the payroll tax each year. The tax hits about 84% of wages earned in jobs covered by Social Security. The White House contemplated pushing that to about 90%, which would mean taxing the first $180,000 of wages.

Congratulations, Mr. President- for recognizing the need to raise the cap. But don't stop there- remove it altogether. Social Security, not being a welfare program, is not, and should not, be needs-based. Wealthy people, as do middle class and poor people, receive Social Security. There is little reason, meanwhile, not to require payment of Social Security tax on all income, especially as, unlike the income tax, the percentage remains the same as income rises (reduced to 4.2% for the employee, still 6.2% for the employer, under the recently enacted tax bill).

If the President truly wants to strengthen an already strong Social Security system, he would be foolish to propose allowing benefits to rise more slowly than at present, raise (gradually or otherwise) the eligibility age, or cut benefits in any other manner. It would be akin to a football team's placekicker intentionally kicking the ball out-of-bounds, enabling the receiving team to begin its drive at the 40-yard line. Instead, Mr. President, kick it into the end zone, proposing the progressive changes which would benefit Americans, allowing most of them to live out their later years without falling into poverty. Then, if Republicans want to cut (by any other name) the program, you can make it clear which party is on the side of elderly Americans and of what is probably the most popular governmental program in history.

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