Commentary

No More Secret Lip-Service: The Dems are Mute on Social Security for Good Reason

House Minority Leader Dick Gephardt says Republican “secret plans” for Social Security privatization “should be debated this year and not swept under the rug.” Rep. Bob Matsui (D., Calif.), ranking Democrat on the Social Security Subcommittee, hopes to force votes on proposals from the president’s Social Security reform commission. However, the real “secret plan” belongs to Gephardt, Matsui, and other account opponents: We know exactly what they’re against — any option for workers to control part of their payroll taxes — but what they’re for is a mystery.

Despite numerous requests, reform critics say they won’t detail their own plans to fix Social Security unless personal accounts are first taken off the table, in effect demanding surrender as a precondition for negotiations. But one gusty personal account opponent, Rep. Peter DeFazio (D., Ore.), has put his cards on the table, proposing government investment in the stock market and the biggest tax increase ever to keep Social Security solvent. Those choices aren’t pretty, which is why election-minded Democrats like Gephardt and Matsui are so eager to keep their own plans under wraps. But DeFazio’s proposal could start exactly what Gephardt, Matsui, and account critics least want: an honest debate on Social Security reform.

Give DeFazio credit. Most personal account opponents start bobbing and weaving the minute they’re asked how to fix Social Security, but the veteran Oregon Democrat says exactly what he would do. Like personal account proponents, DeFazio wants Social Security to hold higher-returning private investments. But unlike personal accounts, which let each worker decide whether to invest in stocks, corporate bonds, or ultra-safe Treasury bills, DeFazio has the government itself invest 40% of Social Security’s funds privately, effectively pushing all workers into the stock market whether they like it or not. Government investment risks political influence over the hundreds of U.S. corporations Washington would hold equity stakes in. While DeFazio attempts to keep investments independent, the investment board members would be appointed by the president and could even include sitting federal employees. Federal Reserve Board Chairman Alan Greenspan calls government investment “very dangerous,” warning Congress in 1998 that any firewalls against political influence would inevitably be breached: “I know there are those who believe it can be insulated from the political process, they go a long way to try to do that. I have been around long enough to realize that that is just not credible and not possible. Somewhere along the line, that breach will be broken.”

Even former Vice President Gore called the risks of government investment “quite serious,” saying, “The magnitude of the government’s stock ownership would be such that it would at least raise the question of whether or not we had begun to change the fundamental nature of our economy.”

But government investment in the stock market is only the beginning. DeFazio would also apply the 12.4% payroll tax to every penny of a worker’s wages, not just the first $84,900 as in current law, pushing the combined top federal income and payroll tax rate to almost 55%. Ten million workers would be hit by this increase — $1.2 trillion over the first 10 years — but the impact on economic growth and job creation would be felt throughout the political and economic spectrum. The worldwide trend has been toward lower and flatter tax rates; DeFazio’s bill would end that trend with a vengeance.

Making matters worse, retirees’ benefits would still be based on the “capped” income of $84,900, so higher wage earners would pay thousands more in taxes annually without a penny’s increase in retirement benefits. For upper earners, the already miserable 2% return from Social Security would become massively negative. DeFazio’s plan also exempts the first $4,000 in earnings from tax, effectively changing Social Security from a popular contributory social insurance plan to a “welfare” program that soaks the rich to pay benefits for lower earners.

Other aspects of DeFazio’s plan are no less controversial. Currently, Social Security benefits are based upon a worker’s 35 highest-earnings years. DeFazio would raise this to 38 years, lowering benefits for all retirees. (To DeFazio’s credit, his plan would increase benefits 5% for individuals over age 85.)

DeFazio would also subsidize upper-income parents by granting them three child-care dropout years without lowering their benefits. But as a Social Security Administration study noted, “Many women work in the paid labor market and raise young children at the same time. These women are more likely to be in families with husbands that are in poorer economic circumstance… . Women of higher socioeconomic status gain more than others from a policy subsidizing dropout years.”

Even with the biggest tax increase in history, DeFazio’s bill keeps Social Security solvent only until 2075, but in 2076 the system still falls off a financial cliff. Moreover, workers would still have no legal right to their Social Security benefits, no assets to call their own, and nothing to pass on to their heirs.

The president’s Social Security commission, by contrast, gave each worker the right to his personal account, and made proposals to keep Social Security solvent indefinitely. Moreover, two of the commission’s three proposals would pay higher benefits to all retirees than DeFazio’s plan, at a general revenue cost just half that of maintaining the current program. True, high-wage retirees would receive less under one of the commission’s plans, but they would be happy to avoid the DeFazio plan’s multi-trillion-dollar tax increase.

Rep. DeFazio calls his tax increases and government investment in the stock market “minor revisions” to Social Security. Most Americans would call them the biggest tax hikes in history and a threat to the independence of the American economy. Rep. Gephardt demands a “full and open debate” on Social Security reform this year. Reformers should oblige him by bringing the DeFazio legislation to a vote. Will account opponents, in an election year, vote for the biggest tax increase in history and government ownership of private businesses? That’s probably why they want to keep their own plans for Social Security a secret.

Andrew Biggs is a former Social Security analyst at the Cato Institute.