President Bush has had notably little to say about one major loser in his budget proposal: serious Social Security reform. He has done worse than just kick the ball down the road by recommending a Social Security Commission. As his tax cut depletes the general revenue surpluses, it depletes the chances for any president or Congress in the near future to pass long-lasting reform.
Social Security reformers from the political right, left and center should be equally concerned about what a large and expansive tax cut would do to the political viability of their ideas.
All reform plans confront a fundamental problem: how to fund the transition to a long-term solution without politically deadly payroll tax increases and serious benefit cuts. The reforms under serious discussion all include some version of private investment—from privatized accounts to private investment by the Social Security Trust Fund to private savings accounts outside of Social Security—to ease this problem.
The reformers realize that today’s system of relying on current workers to pay for the benefits of current retirees—pay-as-you-go—will not remain viable as the baby boomers retire, because if retirement patterns stay as they are, there will be only two workers supporting every one retiree. All the plans recognize that saving more and investing for higher returns—whether for individuals or for the Social Security Trust Fund as a whole—could reduce or even eliminate the need for painful benefit cuts or raises in the payroll tax. But before surpluses emerged in the budget, there seemed no way to construct a reform that didn’t inflict so much pain that it would be politically unworkable. This dilemma has been commonly referred to as the “transition cost problem.”
The projected large surpluses have provided an answer. Reform proposals that only a few years ago would have been political suicide have blossomed. Nearly all of these ideas—from a variety of individual account plans proposed by Representative Bill Archer, Senator Phil Gramm and Senator Judd Gregg to plans to invest the Social Security trust fund proposed by Social Security experts like Robert M. Ball, Henry Aaron and Robert Reischauer—relied in some way on the general revenue surpluses that the Bush tax cut would deplete.
Some may suggest that even if the non-Social Security surplus is depleted, a good chunk of the $2.6 trillion Social Security surplus would be available to implement Social Security reform. But every Social Security surplus dollar is already committed to paying benefits for existing or soon-to-be retirees. Using this money to fund individual accounts for younger workers would be like a young adult’s starting up his Individual Retirement Account by taking away money already committed to his parent’s retirement fund.
Indeed, according to independent Social Security actuaries, if funds were taken from the Social Security surplus equal to what would be needed to start individual accounts based on 2 percent of payroll taxes, Social Security would go insolvent 14 years earlier than projected—unless, of course, benefits were cut significantly. Dressing up such schemes to use Social Security surplus funds as “bridge loans” will not change that basic reality.
Years from now, if a different administration and Congress are trying to address Social Security with only a list of painful options, they will feel we missed a historic opportunity. They will be especially resentful if we have given as much as half of the surpluses that were available to us to the top 5 percent of earners in our society, while most of the options remaining to them for savings will fall on average, hard-working workers and retirees.
The problem with making a large tax cut our nation’s top priority, rather than saving Social Security first, is that it may be far more difficult to save Social Security later.