March 14, 2005

Give And Get

George Will likes Lindsey Graham's proposal to raise the current $90,000 limit on income subject to Social Security taxes. And in order for George Bush to get personal accounts through Congress he's going to have to embrace some means to finance the short-term revenue shortfall they will cause. Bush rightly refuses to cut seniors' benefit levels (which would immediately be hung around his neck by Democrats like his Daddy's "no new taxes" were), and as Will points out, we're going to get there eventually anyway.

The idea of raising (Social Security) taxes on people who make more than $100,000 a year is something enough Democrats should rally behind for Bush to gain some support for private accounts from across the aisle in return. At least it should be on the table. It would show flexibility and a willingness to compromise while also seizing the high ground of fiscal responsibility, without giving up the growth engine that private accounts represent.

Many conservatives will no doubt consider this idea a betrayal of principle. Will says, in effect, get real...

...Intelligent people can differ about whether Graham's suggestion is economically unwise or politically imprudent. However, it hardly blurs the distinction between conservatism and Bolshevism.

The Social Security tax rate has been increased 20 times in 70 years, and the cap on income subject to the tax is indexed to average wages and adjusted annually. It was $4,200 when Graham was born in 1955, $60,600 when he was elected to Congress and $84,900 in 2002. It is projected to rise to $100,200 in 2008 and $121,800 in 2013.

Suppose it were immediately raised to $162,000 -- a senator's salary -- but not indexed. That would be, effectively, a temporary tax increase. The increased revenue -- $525 billion over 10 years -- would more than cut in half the borrowing required to cover the transition costs during the phase-in of personal accounts.

Graham believes that some borrowing is appropriate to make stakeholders of future generations, which will be the biggest beneficiaries of personal accounts. But substantially reducing the borrowing would deny Democrats the ability to disguise as fiscal responsibility their opposition to personal accounts, which really is rooted in reluctance to enable people to become less dependent on government.

And the Democrats' recent outrage over Brit Hume's suggestion that FDR himself foresaw the utility of "private annuities" is misplaced, according to John Fund...

...Roosevelt had indeed proposed a plan under which all workers would have been allowed to make periodic voluntary payments in exchange for certificates representing the amounts they had deposited. At 65, workers would have been able to trade in their certificates for annuities that paid up to $100 a month (the 1935 equivalent of some $1,300 today) based on their total deposits plus interest. In fact, Roosevelt expressly cited the need for private plans to become available as the worst of the Depression passed: "I am greatly hoping that repeated promises of private investment and private initiative to relieve the government in the immediate future of much of the burden it has assumed will be fulfilled."

But Congress balked. In an article this month titled "When Congress Killed Private Accounts," National Journal notes that Rep. Frederick Vinson of Kentucky, who later became Treasury secretary under President Truman, helped kill the private annuity plan, saying he saw no "particular need" for it at that time. But he also told his House colleagues, "Many of us think the time will come when the voluntary annuity plan, which rounds out the security program for the aged, will be written into law." Yes, the plan proposed by Roosevelt and rejected by Congress in 1935 is substantially different from the one Mr. Bush is advocating. But taking into account 70 years of progress in financial instruments, there are also many similarities.

Posted by dan at March 14, 2005 12:49 AM