Reforming Social Security

In my new column for the Financial Times, I try to restate the case for reforming Social Security:

Barack Obama has upset a lot of Democrats by bringing social security back into presidential politics. Paul Krugman of The New York Times is leading the charge. In Mr Krugman’s view, following the administration’s clumsy and aborted effort to reform the system – Democrats would say destroy it – leaving well alone makes best political sense. Mr Obama, sounding like a fiscal conservative, warns that retiring baby boomers are pushing the programme into the red and something must be done. He is, says Mr Krugman, being played for a fool.

Mr Obama’s fix, other things equal, ought to appeal to Democrats. He wants to raise or even abolish the upper earnings limit for the social security tax, at present just under $100,000. This would add six percentage points to the top marginal tax rate, even before you add in the promised unwinding of the Bush administration’s tax cuts. In a televised Democratic candidates debate, Hillary Clinton distanced herself from this “trillion dollar” tax increase on the “middle class”. Mr Obama underlined his point by saying that only the richest 7 per cent of taxpayers would be affected, and that is not the middle class.

We will see how this plays out. Democrats who would generally be in favour of unwinding the Bush tax cuts, abolishing the earnings ceiling on the social security tax and finding a few other ways to raise taxes on the rich, are mainly concerned to keep reform of social security off the agenda. It does not need fixing, they say, it is not broken. Any deviation from that gives Republicans an opening to renew their assault on one of America’s finest social-policy achievements. Why go there?

You can read the whole column here.

Comments

I wonder, given the recent talk of hedge fund manages switching their allegiance to the Democrats, if something like this has a chance of happening. The amount of money raised by the Democrats has been impressive, and at least a healthy portion of that has been because of the donations of the ultra-rich. But I wonder just how much this new situation will upset the traditional coalitions and policy proposals of the Democrats.

Posted by Freddie | November 20, 2007 11:53 AM

Somehow we have moved recently from the totally correct and reasonable point there is no Social Security crisis to the absurd and fanatical point that we can never, never, ever touch the Social Security funding structure in any way, lest Republican fear-mongers portray responsible fiscal stewardship as an admission that there is a terrifying "crisis". That's just crazy. Not every call to shore up a program's revenues is some clarion warning about an impending crisis. It's just government as usual.

Democrats can't even propose to raise taxes the rich anymore. What the hell is the world coming to?

Posted by Dan Kervick | November 20, 2007 1:58 PM

Dan the issue is not whether we should raise taxes on the rich. The question is whether we should do that through the payroll tax as opposed to the income tax or capital gains.

Obama's proposal does not in fact tax the very rich, by and large they don't get their income from wages anyway. What this plan does is to penalize middle class professionals while giving the top 1% a free pass. Moreover it doesn't actually accomplish anything, it just launders more money through a system currently in surplus, all it does is move dollar amounts on a balance sheet. Moreover depending on how the economy plays out over the next decade its end result could be the effective abrogation of the Trust Fund itself.

One of Obama's top economic advisors is Jeffrey Liebman, a recognized expert on Social Security and principal author of the Liebman-MacGuineas-Samwick Non partisan Social Security reform plan otherwise known as LMS. One component of LMS is a cap lift, the rest is a totally regressive package to tax increases and benefit cuts. As such it is tough to not suspect that Obama is buying into the whole LMS package and fronting the only part that can be presented as progressive.

Obama is simply going down the wrong road here. If we really have the political mojo to effectively add 6 points to top rates than lets do so directly, trying to sell that as some sort of 'fix' of Social Security simply plays into the Republican play book by extending the fiction that Social Security is broken to start with. It is a combination of bad policy and bad politics.

At this juncture raising the payroll tax does not shore up Social Security, mechanically it doesn't have the effect that people would think. I don't blame most people for not understanding the actual relation between Social Security accounting and Social Security cash flow. But I expect a little more from my candidate for President. I am not particularly a Hillary fan, but on this narrow issue she is right and Obama is dead wrong.

Posted by Bruce Webb | November 20, 2007 2:48 PM

Do you really think there is any other politically viable way to raise taxes on the rich?

If you just raise their taxes for general revenue, it's not going to be pretty. If you do it for Social Security, some people will get upset, but most will think it's reasonable.

Posted by bob | November 20, 2007 3:27 PM

If you just raise their taxes for general revenue, it's not going to be pretty.

Bill Clinton did so in 1993. It wasn't that difficult. It might not be so difficult to do so again, if it were sold as part of a plan to get rid of the AMT. Better to use the bogeyman of the AMT to progressify the tax code than to employ the excuse of repairing a program, that, as Bruce Webb points out, is not in need of repair.

Posted by Jasper | November 20, 2007 4:25 PM

Thanks for the comments. One problem with lifting the cap merely for the purpose of raising more revenue (as opposed to "fixing Social Security") is that tax increases on the higher-paid and the very wealthy are already promised via the rolling back of the Bush tax cuts. Promising to lift the SS tax cap as well sounds like piling on. Not something I would have done before the election.

Posted by Clive Crook | November 21, 2007 12:19 PM

This may seem naive but seems so obvious a solution.

Why shouldn't the Social Security cap go the other way? In other words, income BELOW the current existing cap should be the EXCLUSION not the source of funding the program. (As it is, funding Social Security with taxes on income up to this level seems counter-intuitive since you are asking the poorest to pay for the elderly poor.)

Instead, why cannot the funding source be a very low percentage of any income (not just wages)ABOVE the current cap? As people's wealth increases -- much of this results from favorable tax rules for them -- they could easily share a miniscule percentage of this wealth, say 1% or even .5% or lower, to support and stabilize the Social Security Program for the elderly. Such a low amount would not endanger their wealth but would, in fact, ensure overall social stability that would ensure their own continued prosperity. (Perhaps someone could provide statistical projections to see the numbers.)

I don't understand why no one raises this as a real possibility since it seems an obvious solution where everyone would benefit.

Nearly a century ago, Theodore Roosevelt recognized the connection between wealth and favorable legislation (business and politics). And he argued successfully that the long-term benefits of recognizing the need for a common obligation from this favored group would actually work to stabilize American society which, in turn, would benefit themselves.

Let our debate consider the option of transforming the Social Security cap from a ceiling to a floor.

Posted by Karen | November 29, 2007 2:02 PM