Social Security crisis? Not if wealthy pay their way (opinion; excerpted)
Source: The Christian Science Monitor
Is Social Security headed for a crisis sooner than thought? Although President Bush says so, not everyone agrees. The system’s trustees estimate the Social Security trust fund is in good shape for another four decades. The nonpartisan Congressional Budget Office figures five decades. Many independent economists think Social Security is healthy for more like six or seven decades.
Unlike ordinary government functions, Social Security is funded by its own tax, the payroll tax. In 1983, at a time when Social Security was genuinely facing a crisis – it was mere months away from failing at the time – a commission appointed by President Reagan and headed by Alan Greenspan proposed a series of fixes. Among other things, the Greenspan commission recommended increasing payroll taxes. Knowing that the baby boomers would begin retiring around 2010, Mr. Greenspan recommended raising payroll taxes by much more than was needed to pay benefits at the time.
Because the surplus payroll taxes were handed over to the federal government (in return for Treasury bonds), this meant ordinary income taxes could be kept low. After all, the federal government has a fixed need for money, and if it gets excess money from payroll taxes it can afford to keep income taxes lower than they’d otherwise be.
So this was the implicit bargain in the reforms recommended by Greenspan and signed into law by Reagan: From 1983 to 2018, low- and middle-income earners would pay excess payroll taxes. This allowed income taxes to be kept low, and primarily benefited high earners. Then, beginning in 2018, instead of raising payroll taxes to pay for baby-boomer retirement benefits, Social Security would begin selling its bonds back to the government. To pay for those bonds, income taxes would be raised – high earners would begin paying higher income taxes.
For more than two decades, low- and middle-income Americans have kept their part of the bargain, paying more in payroll taxes than Social Security needs and helping to keep income taxes low. In return, beginning in 2018, high earners are expected to start paying a bit more in income taxes in order to help keep payroll taxes low.
That’s the bargain that was struck in 1983. It’s one we should keep.
Essentially, Greenspan’s plan allowed high-income Baby Boomers to get around paying for the majority of their own social security benefits. I don’t think it’s too much to ask that they pay higher income taxes for less than a decade in order to fulfill their end of the bargain, given that those in my generation and the ones after will pay the higher taxes for much longer.
It’s because of this issue that I’ve joined the “what crisis?” crowd when it comes to social security. The only crisis is the political problem associated with raising taxes on the wealthy instead of low- and middle-income persons. But that is exactly what the Reagan administration promised to do in 1983…knowing that it would no longer be in power. They wrote a check the Bush II administration is being asked to pay.
Being a cynic when it comes to such matters, I have no doubt that Bush II will find a way out of it. I am, however, interested to see how he’s going to do that without directly contradicting Reagan’s actions.