Kentucky Blog

Because Kentucky Is Not Called the "REDgrass State"

Tuesday, February 22, 2005

Fixing Social Security

The Kentucky legislature is in budget talks so there's not much action here in Frankfort today, so I want to post something on Social Security just to get my two cents worth out there. I don't buy into the "crisis" rhetoric, but neither do I believe we ought to let it get to that point. I fully agree with the strategists that suggest Bush should have to show his hand (i.e., his plan) before the Dems move on their own plan. That makes sense - if Bush wasn't pushing it, no one would be talking about it.

Let's start with a couple pre-suppositions:
  • First, Social Security takes in a surplus each year (current cumulative is $1.4 trillion).
  • Second, that surplus goes to bonds and like investments that get redeemed later to cover future benefits.
  • Conservative (not in the political sense, but rather financial) estimates say that through 2018 Social Security receipts are greater than disbursements (assuming no change in the payroll tax rate).
  • A larger portion is "borrowed" by the shlubs in DC to bring home some bacon - so newspaper editors can say "so and so brought such and such dollars to Louisville, so let's keep him/her" (then the same editors go on to blast deficit spending but I'll leave that for someone else to jump on)
  • The benefits collected constitute "real money," which is to say that Al Gore's "lock box" could be more than a figurative statement - the government gets cold hard cash (or the bank draft equivalent thereof).

Now that's a basic overview, and others with more time can flesh out the ins and outs of bonds, borrowing, and benefit indexing. I understand it, but don't really care to bore everyone to tears, and backing it up with links would take the rest of my day. But I think we can all agree that the foregoing basic tenets are true.

Okay - background. I'm sitting in an airport with a group of friends heading to Vegas. One guy is a conservative and he and I like nothing better than to piss each other off. So we commence. He uses the typical anecdotal method of debate ("well this one guy blew a million dollars because he was irresponsible, and now he's living off the government tit") as his basis for "fixing" Social Security. After a couple beers he admits that there's no "crisis" in the short term but we both agree it is headed for trouble later - and after all, everything can be improved upon. Then he says something that was absolutely stunning (although not as stunning as when Bush said it) - he supported raising the payroll tax to "fix" Social Security. It's stunning because this guy saved $300 on his tax return after Bush's tax cuts and you'd thought he just hit the lottery.

Anyway, our flight's delayed so we continue with creating our bi-partisan solution to Social Security. I agree with raising the payroll tax ceiling (instead of lopping it off at $90,000 - the median household income in America is around $53,000, so those making $90K a year can pitch in their fair share). But that creates too much temptation for greasy handed politicians - I also happen to agree with the Republican mantra that you can't trust the government with your money (I just don't think this current group practices what it preaches).

So now we will have an even bigger surplus to borrow against - so let's do what Al Gore suggested in 2000 and what Bush suggests now. Take the surplus and invest it in indexed funds that are managed by the government. Let the government take bids from fund managers - and I mean real bids, not bids from political chronies - for the benefit of managing this rather large mutual fund. Or better yet, create a revolving management system to prevent any one fund manager from monopolizing and potentially tanking the fund. I happen to subscribe to the belief that over the long term the market does turn a profit - anyone that disagrees is beyond help.

Now I know what you're saying - "how can we possibly manage so many small individual accounts" and Wall Street is saying that very thing (thus the $9 billion figure skeptics assigned to Wall Street as profits). My response is that it's one fund, not millions, and it doesn't belong to one person it belongs to millions. Eventually, with the miracle of interest capitalization Social Security becomes self funding. Had this been done for the past 60 years we wouldn't be having a debate. Of course it still has to be guaranteed by the government, but federal student loans are guaranteed by the government yet private companies are the ones that collect the interest payments. The point is that raising the payroll tax ceiling potentially raises the surplus by as much as $234 billion per year. Consider that in 2002 the surplus was about $160 billion just based on receipts less disbursements.

This is of course opposed by the conservative Heritage Foundation. According to them taxing individuals making over $90K is somehow "unfair" and hurts the "middle class." That's the dumbest crap I've ever heard. The real middle class has very few individuals making $90K, and it's just nothing more than class warfare to suggest that when you reach upper crust status you've "paid your dues" or have somehow become too good to pay the same proportional tax rate as those of us in the underbelly of society. I'll concede the employer contribution should be modified over that amount, but should be tied to other savings incentives such as employer funded 401(k) plans or health insurance or something similar.

But this is a bi-partisan approach that was hashed out between a liberal and a conservative who agreed to address a problem on its realistic terms - not terms founded in ideology or preconceived notions of fact. This debate is an important one, and it deserves us taking the time to think outside the two dimensional box that the DC boys and girls have constructed. And it certainly deserves more than baseless political attacks.

Is this plan perfect? No of course not - it's bound to drive businesses and the wealthy absolutely nuts. But like Lindsay Graham says, Bush has the "courage" to touch the third rail of politics. If he is truly "courageous" and truly committed to "saving" Social Security, then let's see him back a plan that has a basis in reality and one that doesn't ring up another $2 trillion in debt (just over 10 years, and not counting future costs). In this case ideology, no matter which side's, is going to do more harm than good.

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