Once again, evil Republicans want to destroy Social Security with reckless tax cuts. Or so Tom Daschle wants you to think.
On April 18, the House of Representatives voted to make permanent the Bush tax cut, which currently expires on Dec. 31, 2010. The day before that vote, Daschle vowed never to allow consideration of similar legislation in the Senate and offered this warning of tax cut doomsday:
“Tomorrow the House is planning to take up legislation to raid the Social Security trust fund of $400 billion for another tax cut.”
Well, not quite, Tom.
The legislation would extend existing cuts, not create a new one. The 12 Senate Democrats who supported the Bush tax cut could remind Daschle of this minor detail.
And the Social Security trust fund has the curious feature of lacking actual funds. Social Security benefits are paid from current payroll taxes. When the program runs a surplus—as it has for the past 20 years—those extra dollars get spent with other tax revenue and the government issues IOUs to the Social Security program. Far from containing actual money, the trust fund—so beloved of Democrats with presidential aspirations—consists of nothing but these IOUs.
Daschle acolytes will say I’ve been unfair to poor Tom: that despite his not-so-little white lies, his position is correct. When Social Security begins running deficits as baby boomers retire, the government will have to redeem those IOUs. So wouldn’t it be wise to set aside money for this purpose now? Shouldn’t we “shore up” Social Security by putting its current surpluses in a “lockbox” (another favorite Daschle word)?
Unfortunately, the looming crisis is so enormous in monetary terms that not even the most Panglossian of optimists could hope to avert it with today’s surpluses. The unfunded liability of Social Security over the next 75 years is an astounding $25 trillion. For perspective, consider that the projected ten-year budget surplus before Bush’s tax cut, Sept. 11 and the recession was $5.6 trillion. That number is but 22.4 percent of the expected shortfall, and such surpluses will not continue when Social Security starts running annual deficits in the hundreds of billions ($252 billion by 2030, $516 billion by 2070). By then, budget reports will be dripping far too much red ink for the “lockbox” to blot out.
In short, tax cut or no tax cut, we won’t have the funds to sustain today’s system. If Social Security continues in its present form, we will confront the impossible choice of cutting benefits over 30 percent or raising payroll taxes by 50 percent. The former would be politically unthinkable; the latter, economically catastrophic.
Only by reforming Social Security can we avoid this Scylla and Charybdis. Workers must be allowed to keep some of their payroll taxes to create optional personal retirement accounts. Invested safely in bonds and blue-chip stocks, these accounts would earn higher returns than the current program. And allowing baby boomers to invest for retirement now would greatly decrease the cost of providing benefits when they retire.
Because this reform diverts money from the payroll taxes that support today’s retirees, it will require funding. But it is affordable. The bipartisan President’s Commission to Strengthen Social Security developed three models for using retirement accounts to keep Social Security solvent. The cost of reform ranges from $400 billion to $1.1 trillion from now until sometime between 2028 and 2043, depending on the model. These estimates are well within the projected budget surplus for the next 10 years alone, which the Office of Management and Budget now puts at $2.4 trillion–a number which includes the cost of the Bush tax cut. These numbers disprove any claim that Bush’s cut compromises Social Security. By creating retirement accounts, we can afford both.
But asking whether Social Security can be saved despite tax cuts misses the point. Rather, the surpluses needed to reform Social Security will arise largely from the economic growth created by Bush’s cut.
It is de rigueur for the Harvardian intelligentsia to scoff at supply-side economics. But tax cuts are not the sinister sires of deficits that liberals claim they are. Low taxes provide incentives to work, save and invest. That means growth, and growth coupled with fiscal restraint means higher tax revenue. For evidence, one need only consult the historical record. Between 1961 and 1968, following the Kennedy tax cut, the economy grew by 42 percent and tax revenue rose by a third. The Reagan tax-cut, so fashionably maligned, brought a similar boom. The deficits of the 1980s resulted from spending run rampant, not from the tax cut itself: between 1981 and 1989, revenue from personal income taxes actually grew by 28 percent. Nor can Bush’s cut be blamed for this year’s projected deficit. Recession and the Sept. 11 attacks account for over 86 percent of the predicted shortfall, and a return to surpluses is expected between 2004 and 2006.
Tax cuts alone are no cure-all, and future surpluses will depend on the willingness of Congress to restrain federal outlays. But history shows that when lawmakers control their proverbial pocketbooks, tax cuts bring bigger surpluses over the long haul. For Daschle to blithely slander Republicans as trying to raid his imaginary trust fund is knavish and cheap. Low taxes and low spending are our best hope of funding reforms to save Social Security. Making the Bush tax cut permanent is a necessary first step to that end.
Jason L. Steorts ’01-’03 is a philosophy concentrator in Dunster House. His column appears regularly.