November 28th, 2006

Bush’s Tax Peril

Posted in  Entitlement Reform 
Author: Peter Ferrara || Location: Washington, DC, USA

Our Peter Ferrara has a piece in the New York Post  today on President Bush's apparent intention to make a terrible compromise on Social Security, endorsing benefit cuts and payroll tax increases, and throwing personal accounts overboard.

BUSH'S TAX PERIL

November 28, 2006 -- THE Bush administration seems set to push for a huge hike in Social Security taxes and a major cut in future promised benefits. Worse, the plan doesn't include the personal accounts that President Bush discussed while campaigning in 2000 and 2004. As a result, it doesn't truly save Social Security.

The president's staff is negotiating with Congress's new Democratic majority now. My sources on Capitol Hill say the White House has already sold most Senate Republicans on this political loser.

The plan being pushed by top White House staff would raise the Social Security ceiling - the cutoff for the program's payroll tax - from $94,200 to as much as $150,000. Some would pay as much as $7,000 per year more in Social Security taxes.

This would hit especially hard in states like New York and California - expensive areas where a higher proportion of workers in this income range live. It would also slam small business and the self-employed who pay both the employee and employer shares of the tax.

The net effect would be to boost the total top marginal tax rate by 12.4 percentage points (the total Social Security payroll-tax rate), more than offsetting the Bush income-tax-rate cuts - and so slamming the economy, too.

And it won't even effectively address Social Security's long-term financing problems. Workers who don't pay taxes on income over the ceiling also don't get benefits for income over the limit. Raise the limit, and more income gets counted toward future benefits - leaving little net gain over the long run. Maybe that is why White House spokesman Tony Snow said recently that Bush has not ruled out raising payroll-tax rates, too.

The plan's benefit cuts would ultimately slash future benefits by 30 percent or more for all workers making over $25,000 a year. (The cuts would be phased in faster for those earning over $100,000.)

The cuts are based on changing the program's basic benefit formula so that future benefits to be paid to today's workers would grow with prices, rather than with faster-growing wages. Taxes, however, would still grow with wages. With taxes growing faster over time than benefits, Social Security's effective return would perpetually decline.

And the program already pays very low real effective returns. For many workers, the real return promised under current law is already close to zero or even negative. These changes would ultimately turn it into a thinly disguised welfare program, with everyone but the poorest workers getting negative returns. Most Americans would get a better deal just stuffing the money into mattresses.

There's a better way. Hill Republicans are now developing a new personal-accounts bill that would achieve full solvency for Social Security without any tax hikes or benefit cuts. The accounts (limited to about half the worker's share of his Social Security payroll taxes) would eventually take over so much responsibility for paying retirement benefits that Social Security deficits would be permanently eliminated. Moreover, workers would actually get higher benefits because of the much higher market returns that would be earned on personal-account investments.

This legislation should turn the Social Security debate into a choice between the personal accounts versus the Bush/Democratic tax hikes and benefit cuts.

The personal accounts Bush once so bravely advanced are the only reason to address Social Security now. If they are off the table, there is no reason to adopt tax hikes and benefit cuts today, with insolvency still 40 years away.

Reform would be better off waiting for a new president smart and articulate enough to advance personal accounts and all of their enormous benefits for working people effectively.

Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation.