Commentary

Fatally ‘Progressive’ Social Security

This article originally appeared in the Washington Times on May 5, 2005.
Despite President Bush’s promise not to negotiate with himself on Social Security, he keeps tossing out ideas intended to placate Democrats that end up having the opposite effect.

In his April 28 press conference, he said, “I propose a Social Security system in the future where benefits for low-income workers will grow faster than benefits for people who are better off. By providing more generous benefits for low-income retirees, we’ll make this commitment: If you work hard and pay into Social Security your entire life, you will not retire into poverty.”

The idea came from Democrat Bob Pozen, an attorney and mutual fund executive. For workers with average “career” earnings below $25,000 by 2012, “progressive indexing” would continue adjusting first-year benefits upward to keep pace with wages, with price indexing after the first year as we do now. Those with average career earnings above $113,000 would have initial benefits adjusted for inflation alone — about 1 percent a year slower than with wage indexing. That is what the president had previously proposed for everyone — and with fewer complaints from Democrats.

When the president embraced the notion of having benefits grow least rapidly for high-income workers, the idea received the harshest criticism from egalitarian Democrats. New York Times columnist Paul Krugman called it a vicious “attempt to turn Social Security into nothing but a program for the poor.” Kerry adviser Jason Furman called Pozen’s plan “a system … in which upper-income people would have less of a stake in traditional Social Security, potentially undermining political support for it.”

Pozen finds this hypocritical, since his fellow Democrats have been eager to raise the amount of salary subject to payroll tax from $90,000 to a much higher figure. Do they imagine Congress could slap an extra 12.4 percent tax on upper-income people without making them feel they had “less of a stake in traditional Social Security”?

Even without the Pozen plan, the Social Security benefit formula is already rigged so that those who paid into the Social Security system for the fewest years receive a much better deal that those who paid “their entire lives.” Those who paid payroll taxes for decades are also more likely to have saved for retirement or to keep working past age 65 — either of which means 50 percent to 85 percent of their benefits will be taxed. Even if Social Security remained an unreformed time bomb for a while, fewer and fewer people are going to feel they have a fair stake in it in the near future.

All proposed solutions we’ve seen so far from Democrats would further undermine popular support for Social Security by tilting today’s heavily means-tested Social Security system even more severely against those who pay the most in payroll taxes.

The Brookings Institution volume “Saving Social Security” would cut benefits substantially for “the highest earners” — meaning those fat cats with lifetime earnings “above about $44,000 in 2003.” Top earners would also pay an extra 3 percent or more in payroll taxes, called a “legacy tax.”

Although those with high incomes would be paying much more in taxes than everyone else (and receive far less in benefits per dollar of taxes paid), there would nonetheless be benefits cuts for everyone retiring after 2023 in this plan. Payroll tax rates would also begin to be increased every year at that time. These are the sorts of “modest adjustments” left carefully unexplained in AARP’s TV commercials.

Democrats and their allied scholars have yet to suggest any solution to Social Security’s excessive promises that would not tilt the system even more harshly against long-term payroll taxpayers and thus undermine political support for Social Security. Only private accounts could avoid that fate.

A Fox poll on the eve of the president’s talk showed 84 percent of those under the age of 55 think people of that age should have the right to choose between keeping all of their Social Security contributions in the current system or investing some portion of those funds. The opportunity to choose more than one retirement plan has such overwhelming appeal because it’s fair. Taking money from Smith to pay for the retirement of Jones only sounds fair to Jones.

How did the president get talked into supporting a “progressive” plan economists detest and progressives despise? He has apparently been deceived by a common misperception that people Social Security classifies as low-income workers were poor while working “all their life” and must therefore be poor at retirement.

In reality, low-income workers are far less likely than average workers to have paid into Social Security for a lifetime, or even for two decades, which is often the reason they appear to have low lifetime earnings. Since people qualify for benefits with just 10 years of full-time work, someone who earned $100,000 a year for just 10 years is considered just as “low income” as someone who averaged only $28,571 a year over 35 years. Social Security’s “low-income worker” may have had an above-average income during the few years he or she worked full time, and is not infrequently married to someone with ample retirement assets.

President Bush added that he “will work with Congress on any good-faith proposal that does not … harm our economy.” But the Pozen plan would inflict serious damage to work incentives. As economist Alfred Tella explained in The Washington Times: “Workers’ skills are hard-won. If too big a chunk of the rewards of greater efficiency is taken from the more productive and transferred to the less productive, perverse disincentives inimical to economic growth can result.”

If initial benefits kept rising in real terms only for those who pay the least in Social Security taxes but were adjusted only to maintain purchasing power for those who pay the most in Social Security taxes, then real benefits would end up being nearly identical regardless how much was paid in payroll taxes. That prospect of getting by far the best retirement deal by doing the least work would seriously discourage more than minimal work effort and saving.

Any Social Security “reform” that insists on being increasingly generous to those who paid the least in taxes would soon be increasingly perceived as grossly unfair and therefore politically untenable.

Sustainable reform must enhance rather than diminish the link between what is paid in taxes and what is received in benefits. Personal accounts do just that. Most other proposals move in the wrong direction, politically as well as economically.

Alan Reynolds is a senior fellow at the Cato Institute and a nationally syndicated columnist.