In Sunday school, I was taught that the definition of chutzpah was a child who murdered his parents and then pleaded for the mercy of the court because he was an orphan. The Bush administration’s simultaneous pleadings that a large, explosive tax cut is affordable and that Social Security is in imminent danger certainly could be a contender for the definition of fiscal chutzpah.
First the administration started the year by successfully pooh-poohing concerns that a large tax cut should be resisted until we know how much of our surplus should be saved for Social Security solvency and reform. The result was a tax cut that—including lost interest—amounted to $1.7 trillion over the next 10 years and a whopping $4.1 trillion over the second decade of the new century.
Now the administration has taken the position that the important date for Social Security financial distress is not 2038, as current law suggests, but 2016—the year that annual payroll taxes are not enough to cover annual benefits for existing retirees. Democratic critics have cried foul, claiming that the administration is intentionally ignoring the assets in the Social Security trust fund and using an earlier date as a scare tactic to convince the public that Social Security needs a radical privatization overhaul to fix it.
However one views the Bush administration’s tax cut or its view that Social Security is in financial distress 22 years earlier than commonly believed, what is most remarkable is the fact that it is able to hold both these positions at the same time. That is why, rather than join the troops of Democratic critics who wish to blast the administration for using the 2016 date, I want to take their claims on Social Security’s early distress seriously and encourage them to do so as well. For however sound are the arguments that the Social Security trust fund has real assets that can keep the system solvent until 2038, if the administration seeks to point to the financial trade-offs encountered in 2016 as a means to spur our nation to increase national savings and act quickly to prevent a more serious financial crisis, I am a potential convert. But for the administration to convince anyone that using the date 2016 is a serious call to action—and not just a scare tactic for privatization—it needs to show that it is serious about increasing national savings now.
Simply diverting 2 percent of payroll taxes for new individual accounts doesn’t do it. Simply choosing to save a dollar in an individual account, instead of saving it by paying down debt, is at best a wash.
Indeed, plans to divert current payroll taxes actually make the 2016 crisis worse. If we withdraw 2 percent of payroll revenue now being used to pay benefits to current retirees to save for future accounts, the date that payroll revenues can’t cover benefits comes nearly a decade sooner, in 2007! Any serious effort to build savings or find transition funds to a reform must start with reconsidering at least part of the $6 trillion that is being drained from the surplus over the next 20 years. The administration and Congress could protect the current stimulus tax cut, still give every American a long-term tax cut and ensure that 98 percent of Americans get the full tax cut they were promised, while still freeing up enough funds to close half the financial gap Social Security faces. How?
The president and Congress can pass a Social Security reform reserve fund that simply says that in light of the Social Security issue our nation cannot responsibly implement the full repeal of the estate tax, and the second and third stages of the tax cut for those in the top 2 percent (36 percent and 39.6 percent tax brackets) until we know that we have saved enough to save Social Security. The 98 percent of American families making less than $180,000—those in the 15 percent, 28 percent and 31 percent tax brackets—would get their full tax cut, and even those in the very top brackets would benefit from these tax cuts as well as the initial cut in the highest rates. No one would see his existing taxes raised in any way.
The money—more than $1.25 trillion—freed up from this repeal would be back on the table for Social Security reform and could close over half of the 75-year financial solvency gap. While hard choices would still be needed for 75-year solvency, the administration would have the moral high ground to ask for such sacrifice. If it keeps the full tax cuts in place, reaction to every tough choice it asks of others is going to be justifiably met with the claim that the measure in question could be avoided if the next stages of the tax cut for the well-off were taken back.
This type of Social Security reform reserve fund would show critics and skeptics that the administration is serious and credible in using a 2016 crisis date for Social Security. A less fiscally responsible response would make them too much like the child who gave away money being saved for his parents retirement and then pleaded for mercy on the grounds that his parents would soon be going broke.
The writer was director of President Clinton’s National Economic Council and assistant to the president for economic policy. He is now a guest scholar at the Brookings Institution.