President George W. Bush has said he opposes raising payroll taxes to reform Social Security, but he may entertain a proposal by U.S. Senator Lindsey Graham (R-SC) that would sharply increase the payroll tax on upper-income earners.
During a November 17 speech at The Heritage Foundation, Graham proposed raising the limit–he did not specify to what level–on the amount subject to the 12.4 percent Social Security tax. On January 1 the taxable-income limit rose from $87,900 to $90,000.
White House Avoids Clarity
At a daily press briefing December 9, White House Press Secretary Scott McClellan was asked about Graham’s proposal. He declined to say whether Bush would consider raising the amount of income subject to Social Security tax to be a payroll tax increase, if the tax rate remained the same.
Ten days later, on separate Sunday talk shows, White House Chief of Staff Andrew Card and Treasury Secretary John Snow also declined to rule out the possibility of lifting the limit on the amount of income subject to the payroll tax. Instead, they focused on the rate at which income is taxed.
On ABC’s This Week show, Card said, “The rate that you and I pay, contribute, to our Social Security, the president does not want to see that rate increased.” He declined to elaborate.
On Fox News Sunday, Snow made a similar comment.
Tax Hike Tradeoff Considered
Graham said he believes a tax increase on high-income earners is needed for the president’s proposal for personal Social Security accounts to pass Congress. The president has proposed allowing younger workers to set up personal accounts into which they may invest a portion of their Social Security taxes. The president and his advisors on this issue believe private accounts controlled by individuals are likely to generate greater returns over time than the current system, which pools all tax receipts and doles them out to current retirees.
Some economists expect privatization of a portion of Social Security taxes to generate “transition costs” of between $1 trillion and $2 trillion. Lindsey believes substantially lifting the amount of income subject to the Social Security tax could pay off any transition costs in 10 years. He also believes the strategy could bring some Democrats in Congress to accept private accounts. Without Democrat support, such reform is likely to die, he said.
“Those of us committed to reforming Social Security must honestly deal with the transition costs that come about when personal accounts are established,” Graham said on December 9. “Under my plan, which has been evaluated by the Social Security Administration, we are able to achieve permanent solvency, but the transition costs are over $1 trillion.
Other economists say transition costs would be much less than Lindsey projects, or even non-existent.
In an essay published January 11, 1999, in The New York Times, Nobel Prize-winning economist Milton Friedman wrote, “given a proper understanding of Social Security’s current unfunded liabilities–variously estimated at from $4 trillion to $11 trillion–there are no real transition costs to privatizing Social Security, merely the explicit recognition of current implicit debt.”
In a December 12, 2004, article for the Philadelphia Inquirer, Jagadeesh Gokhale, senior fellow at the Cato Institute, made much the same point, but with updated estimates:
“The so-called ‘costs’ of reform are already there,” Gokhale wrote. “They’re part of the current system and will continue to grow unless reforms take them fully into account. The full, official measure of the government’s commitment to pay future retirement benefits in excess of future payroll taxes amounts to $12 trillion (in present value terms) under the current system. And, just like debt, this cost grows with interest as time passes.”
Gokhale continued: “Under the current system of budget accounting, all of this cost remains hidden. Indeed, because the Social Security trust fund currently holds government IOUs, many believe that Social Security is well funded and not in trouble; and this partly explains the eye-widening reaction when someone suggests that the ‘transition cost’ of a reform plan is $2 trillion.
“Few people appreciate that the amount of those IOUs is insufficient to pay more than three years’ benefits to current retirees,” Gokhale wrote. “The remaining years’ benefits must come out of current payroll taxes paid by workers–which implies those funds won’t be invested for their own future retirements.”
Minority Leader Remains Skeptical
Graham said four things are necessary to save Social Security: “presidential leadership, bipartisan support, the rejection of rigid ideology preventing workable solutions, and shared sacrifice by the American people.”
At a December 9 press conference, House Minority Leader Nancy Pelosi (D-CA) roundly criticized reform concepts. She told reporters reforms such as allowing younger workers to put tax money into private accounts “undermine Social Security by pitting ages against each other, convincing young people it’s not going to be there for them. That’s the beginning of the end for Social Security, the end of the concept of one generation helping another generation. So I’m in a ‘show me’ situation. Show me how you can take money out of a situation where you’re concerned about having enough money to make ends meet and have those ends meet.”
Steve Stanek ([email protected]) is managing editor of Budget & Tax News.
For more information …
The Heartland Institute’s free online research database, PolicyBot™, offers more than 150 documents on Social Security reform in PDF and HTML formats. Point your Web browser to http://www.heartland.org, click on the PolicyBot™ button on the home page, and choose the topic Social Security.