Friday, January 14, 2005

On Social Security Reform Part 1

Wading into treacherous waters (because the policy details are probably over my head), in the following two posts I will attempt to (1) assess whether there is a social security crisis that we should do anything about and (2) specifically assess the President's "privatization" plan and propose a specific alternative. In the second post, this discussion's relationship to the Social Gospel and Christianity will become clear. In the first post, some background is necessary.

First, there is no social security crisis independent of the generalized budget deficit crisis. As Princeton Economist and New York Times columnist Paul Krugman has shown

Right now the revenues from the payroll tax [supposedly dedicated to social security] exceed the amount paid out in benefits.

Thus, while the rest of the government runs a deficit, social security -- the program targeted by the Bush Administration as a "problem" is actually the one program -- because it has sufficient, designated taxes -- which is running a surplus. See Inventing a Crisis, New York Times, December 7, 2004 A27.

But I sense an objection brewing in my readers minds. What happens when the baby boomers retire and we have more beneficiaries? Won't the resulting expense be crippling? In short, no. The distant future benefits that the current dedicated taxes won't support are modest. In other words, while the general budget runs a massive deficit now, the social security program will run a modest deficit in the future.

What would it take to make up the shortfall? Not much. Krugman crunched the numbers (which he got from the Congressional Budget Office) and found that
extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending -- less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts -- roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

So if we added back just the Bush tax cut that went to those making over half a million dollars a year to the payroll taxes which have been specifically dedicated to social security for years, then we could assure the program's solvency at least through the year 2100.

So what's the problem?

Well, basically the problem is that the government has been dipping into social security-dedicated payroll taxes to fund general budget items for years. So the money is supposed to be there theoretically, but it isn't.

If you think about it then, the problem isn't social security. The problem is the massive budget shortfall in general which is caused by many things including economic recessions and excessive tax cuts for the wealthy. Social security contributes to the problem only insofar as it is a pricey budget item in general. But National Defense, National Security, Medicare, etc. are also costly budget items which are increasing in size.

So it isn't social security per se, but the budget in general which is in need of "salvation." The question becomes, then, not how we can save social security -- because we can do that alone in any number of quick and easy ways -- but whether social security "reform" is a good way at attacking the general budget crisis, recognizing that cuts in other programs or tax hikes could accomplish the same objectives.

In the next post I will, oddly, agree with the President that "reforming" social security is an important piece of the general budget reform puzzle. But I will vigorously disagree as to means.

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