[Homestead] The real reason for Social Security reform

Gene GeRue genegerue at ruralize.com
Fri Feb 11 11:41:07 EST 2005

This is from the highly conservative National Review Online:

February 10, 2005, 8:48 a.m.
The Real Reason for Social Security Reform
If we don’t overhaul the program, your income taxes will skyrocket.

At long last, we are finally starting to get some meaningful details about 
President Bush’s Social Security reform proposal. Inevitably, this is 
already starting to change the debate on this issue. Up until now, all we 
have heard is that Bush wants to establish some sort of private accounts as 
part of Social Security. But we have heard nothing about how such accounts 
would do anything to solve Social Security’s long-term financing problems.

Obviously, private accounts per se accomplish nothing unless accompanied by 
some reduction in future benefits for those with the accounts. Indeed, 
without benefit cuts, the creation of private accounts will worsen Social 
Security’s financial woes because the Bush plan contemplates diverting 
Social Security taxes into the accounts.

I have heard more than a few people discuss Social Security reform as if 
the private accounts will magically fix Social Security without any 
necessity of reducing benefits. Indeed, they are adamant that there not be 
any cut in benefits whatsoever, now or at any time in the future.

Obviously, such a position is ludicrous. The whole point of creating 
private accounts has always been as part of a trade-off. Workers would lose 
future Social Security benefits, which are what stabilize the system’s 
finances, and the income earned on the accounts would compensate them for 
this loss.

In order to induce people to make this trade-off, Bush strongly emphasizes 
that the status quo is unsustainable in the long run. He points often to 
the fact that the Social Security trust fund will be exhausted in the year 
2042. At that point, current projected revenues from the payroll tax will 
only cover about 75 percent of promised benefits. The implication is that 
benefits will either have to be cut across the board by 25 percent or the 
payroll tax rate will have to rise by about 4 percentage points.

In other words, reforming Social Security now is less risky than doing 
nothing, as Democrats favor. When they scare people with benefit cuts, 
Democrats are in effect promising something that cannot be delivered. As 
many workers have discovered in recent years, the bankruptcy of private 
businesses often leads to a loss of pension benefits.

What is always left out of this scenario is that the Social Security tax 
begins falling as a net contributor to federal revenues in 2008, when the 
surplus of Social Security taxes over benefits will peak at 0.8 percent of 
the gross domestic product. After that, this figure gradually falls to zero 
in 2018 and becomes negative thereafter. By 2045, the shortfall between 
Social Security taxes and benefits will equal 1.7 percent of GDP.

What this means is that long before the trust fund is exhausted, income 
taxes will have to rise by an amount equal to the difference between 
current Social Security revenues and benefits. In other words, income taxes 
will have to go up by about 2.5 percent of GDP between now and the date the 
trust fund is exhausted in order to redeem the bonds it holds, which will 
be cashed-in to pay benefits over and above Social Security taxes.

But on the date the trust fund is exhausted, taxpayers will have paid off 
their debt to the trust fund. Thus income taxes could theoretically fall by 
1.7 percent of GDP on that day. If the payroll tax had to rise by the same 
amount, most taxpayers would be unaffected. Their income taxes would go 
down by exactly the same amount that their payroll taxes went up. More 
likely, Congress would simply authorize general revenue financing for 
Social Security, which is what happens when the trust fund is drawn down 
anyway. In short, absolutely nothing would change in terms of either taxes 
or benefits on the day the trust fund is exhausted.

What this means is that there is no apocalypse in 2042, wherein anyone’s 
benefits will suddenly be cut or their taxes sharply raised. Congress will 
never allow benefits to be cut that way, and the implicit tax increase will 
take place gradually long before that date. It would only take a matter of 
hours for Congress to authorize general revenue financing should there be 
no changes to the Social Security program over the next 37 years.

Still, it is highly undesirable to raise taxes by the equivalent of 2.5 
percent of GDP over the next several decades to pay Social Security 
benefits. That would be equivalent to raising income taxes by 34 percent 
this year. This is the real reason to reform Social Security today — not 
because of looming bankruptcy, which will never be allowed to happen.

It may be politically useful to use apocalyptic rhetoric to sell a 
controversial Social Security reform plan. But the real reason to reform 
the program is to prevent a massive income-tax increase, not because 
anyone’s benefits are threatened by inaction.

— Bruce Bartlett is senior fellow for the National Center for Policy 
Analysis. Write to him here.

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