Privatizing Social Security, Part 2

In Privatizing Social Security, Part 1, oldstyleliberal took note of the fact that the water level in the Social Security trust tund "reservoir" will start dropping in a decade or so, and by late in the second quarter of this century the reservoir will fully run dry. That means Social Securiy benefits are threatened in the medium term, and if nothing is done, will one day stop flowing entirely.

What to do? There are two basic options. One is President Bush's proposal to partially "privatize" Social Security, plowing payroll deductions into personal retirement accounts which, if their annual yield is at least 3 percent higher than the inflation rate, will eventually make retirees better off than they are today under straight Social Security. (Or so says the Bush Administration.)

The other basic option is to raise taxes. If more tax money were collected, it could be funneled into the Social Security trust fund to make up the shortfall in contributions. Of course, the contributions themselves are taxes — payroll taxes. Conceivably, raising the (FICA) payroll tax rate and/or the maximum pay level which is subject to the payroll tax could help.

But that idea's not even on the table. Doing that would burden less affluent workers, all of whose pay is under the maximum, more than more affluent workers, some of whose pay is not taxed.

In other words, the payroll tax is regressive. Both politically and mathematically, there's no way a regressive tax could solve the Social Security problem. What's needed would be to target a progressive tax such as the income tax.

That's why critics of the President's plan such as former Social Security Commissioner Kenneth Apfel recommend making the income tax more progressive as a Social Security fix. Apfel wrote in "Unnecessary and unwise" in The Baltimore Sun:

Simply repealing the Bush tax cuts for the richest 1 percent of Americans would resolve a large part of the Social Security shortfall.

In other words, Apfel wants to make tax rates higher for the people with the biggest incomes. That is equivalent to making income taxes more progressive. (And the Bush tax cuts were equivalent to making them less progressive.)

In addition to personal retirement accounts and tax hikes, there are other fixes to Social Security that have been suggested, but privatization and tax increases are the major topics in the debate.

Which leads oldstyleliberal to his suggestion: why not do both?

Why not both institute personal retirement accounts and roll back the Bush tax break for the top 1 percent.

There would be several advantages. First and foremost, a lot of the burden which falls on the Bush privatization strategy, all by itself, would be taken off. Right now, critics charge the Bush scheme with (for example) not being able to adequately replace today's survivor and disability benefits, or not being able to keep its promise to lock in benefits for those currently 55 or over.

Such worries would very likely vanish if the top-1-percent tax cut were rolled back and the proceeds were funneled into the Social Security trust fund.

Likewise, part of the tax-cut rollback could be used to finance a special fund to indemnify those unlucky individuals whose personal accounts tank.

But the main appeal of oldstyleliberal's "do both" approach would be that both sides in the debate would have to give ground. The liberal Democrats would have to get on board with privatization, and all the President's men would have to get jiggy with raising taxes on the wealthy back to pre-Bush levels.

In other words, the "do both" approach nurtures the art of compromise — something sorely lacking on both sides in today's political climate.