Commentary

Would More Taxes Equal More Savings?

This article was first published in the Washington Times, September 5, 2001.
John Berry of The Washington Post on Aug. 17 called attention to “warnings by Federal Reserve Chairman Alan Greenspan” that investing some portion of Social Security taxes in private accounts “will not solve Social Security’s long-term funding gap.” According to Mr. Berry, closing this “gap” requires raising the ratio of national savings to GDP — the “national savings rate.” That, in turn, can supposedly be done by collecting more taxes:

“Only if the private accounts were funded in a way that increased national savings, such as through higher taxes … would they address Social Security’s long-term problems …. When President Ronald Reagan asked Greenspan to head his Social Security commission 18 years ago … the answer then was higher payroll taxes … The Bush administration is not open to a similar solution today.”

What that means is that taxes are savings. If only Social Security taxes were higher, says Mr. Berry, the government could run even bigger surpluses and retire debt even more quickly. Buying back Treasury bonds, in this view, is supposedly no different from adding to a company’s reinvested profits or to money invested in a family’s 401 K account:

“This process of debt repayment adds to total national savings, making more money available to the private sector to finance investments — usually at lower interest rates, the Fed chairman has explained.”

According to Mr. Berry’s translation, Mr. Greenspan believes that if the government takes more money from taxpayer Smith and gives it to bondholder Jones, someone will have more money “to finance investments.” Whether or not the Fed chairman really believes that more taxes from workers equals more credit for businesses, that old Keynesian hoax was thoroughly refuted by recent experience. The massive swing from budget deficits to surpluses in recent years did not raise the “national savings rate” at all, nor did it lower interest rates. In fact, the Fed chairman defied his own fiscal theory of interest rates by more than doubling the fed funds rate between 1993 and 2000 as the government’s budget moved from deficit to surplus. Japan easily combines near-zero interest rates with huge budget deficits because low real interest rates are a symptom of stagnation, not of budget surpluses.

The Washington Post hopes to awe readers by quoting the Fed chairman. After all, Mr. Greenspan fixed Social Security in 1983, right? What the Greenspan commission really did was to devise another excuse to raise taxes on both wages and benefits. Mr. Greenspan viewed excessive payroll taxes “as a way to increase the total level of savings in the United States.” That was proven wrong then, and is just stubbornly wrong now.

Mr. Berry quotes Chairman Greenspan saying he regards the distinction between Social Security and private accounts as a mere “zero-sum game,” and as adding that “I don’t care who owns it.” But real people do care who owns the keys to their financial future.

Congress and the Fed chairman cannot be trusted with your retirement funds. Their idea of fixing “the system” is simply to fill the “funding gap.” That part is easy. The funding gap could easily be closed by, say, raising the retirement age to 106. But it is not logically possible, contrary to Mr. Berry, to address the inequity that taxes on our most industrious young people are going to far exceed their benefits by raising their taxes still higher. And, no, taxing the stuffing out of young workers would not raise national savings either.

All the worrisome whining about “risks” of privatizing Social Security deal with risks that are truly trivial in comparison with doing nothing. Scare talk about “dangers” of private pensions is equally applicable to IRA, Keogh and 401k programs. Yet those programs are extremely popular even in a down market because people, unlike politicians, take the long view.

Those solely concerned about “saving the system” — rather than about saving people stuck in the system — are missing the point. The point of relying less on Social Security and more on personal retirement accounts is not to solve some “funding gap” of the government’s monopoly pension scheme, but to solve the “funding gap” of young people who are already scheduled to be grossly overtaxed. To even suggest that taxing the next generations even more heavily will somehow fix something — least of all their ability and incentive to save — is nonsensical even by Washington standards.

Alan Reynolds is a senior fellow with the Cato Institute.