Commentary

Moynihan’s Social Security Plan Is Less Than It Seems

When a die-hard defender of the welfare state suggests that a portion of Social Security might be privatized, people sit up and take notice. When that suggestion comes from someone as articulate and respected as Senator Daniel Patrick Moynihan (D-N.Y.), something important is clearly happening.

Public reaction has been intense. Liberals have attacked the Senator for tearing up the intergenerational contract. Conservatives have hailed him for a miraculous conversion to free markets. But before we all get carried away, let’s take a closer look inside this Trojan horse.

Senator Moynihan has recognized two key facts. The first is that any reform of Social security must increase the system’s miserable rate-of-return. Most of the current debate over Social Security has focused on the program’s looming financial shortfall. After all, Social Security will begin running a deficit, spending more on benefits than it takes in through taxes, in just 14 years. But, equally important, is the fact that most young workers are going to lose money under the program — receive back less in benefits when they retire than they will have paid in taxes. Most suggestions for keeping Social Security financially solvent, such as raising taxes or cutting benefits, will only make Social Security’s rate of return even worse.

This has led to the other inescapable fact that Senator Moynihan has recognized: a powerful movement has developed to replace the current Social Security program with a new system based on individually owned, privately invested retirement accounts. Public opinion has swung behind privatization. A recent Zogby poll found 61 percent of Americans supporting the concept. In response, more and more members of Congress have been willing to step forward and touch the “third rail of politics.” It is to head of this rising tide that Senator Moynihan has offered his plan.

At the heart of Senator Moynihan’s proposal is a massive tax hike, one of the largest in U.S. history. He would raise the cap on earnings subject to the 12.4 percent Social security payroll tax from $68,400 to $97,500. That means a worker earning $97,500 would face a tax hike of roughly $3,600 per year. He combines this with a nearly 30 percent reduction in Social Security benefits, primarily through a reduction in the Consumer Price Index and raising the retirement age. (By the way, changing CPI will also result in an income tax hike for millions of Americans forced into higher tax brackets).

In return, the Senator’s plans would give workers a temporary two percentage point reduction in the payroll tax, with workers allowed to contribute that money to privately invested retirement accounts. That’s right, a temporary tax cut. Under the senator’s plan taxes are scheduled to not only return to their current level by 2030, but actually eventually rise to 13.4 percent.

Senator Moynihan’s plan is not about restructuring Social Security — it is about preserving the current system. The senator is candid about this. His goal is to offer just enough tinkering to head off real reform.

But we’ve already tried tinkering. Taxes have been raised 38 times since Social Security’s inception. For young workers, benefits will be less than taxes paid. After each of these fixes, our political leaders pronounce Social Security saved. A few years down the road, a new crisis is discovered and the tinkering starts anew.

No amount of tinkering can fix social Security’s fundamental structural flaw-a pay-as-you-go financing system that resembles the type of pyramid scheme illegal in all 50 states. Under a pay-as-you-go system, taxes paid by today’s workers are not saved for those worker’s retirement, but immediately paid out as benefits to today’s retirees. Senator Moynihan’s plan is designed to preserve-indeed to strengthen, this Ponzi-like structure. Yet, given demographic trends toward more retirees and fewer workers, pay-as-you-go financing cannot be sustained.

The only way to truly fix Social Security is to transform it into a system based on individual savings and investment, a system where each worker’s taxes are saved and invested for that worker’s retirement, not just 2 miserly percentage points but all of it. This is the type of system successfully implemented 16 years ago in Chile, and since copied around the world.

The current debate over Social Security has given us an historic opportunity to offer young Americans a genuine alternative to this failed system. In offering his proposal, Senator Moynihan, in effect, concedes that privatization advocates have won the intellectual and political debate. But his plan falls far short of the type of bold reform needed.

Now is not the time to compromise-or be sidetracked by pseudo-reform. Now is the time to demand a new, better Social Security system that gives American workers real control over their retirement security.

Michael Tanner is director of health and welfare studies at the Cato Institute and founder-director of Cato’s Project on Social Security Privatization.