Monday, September 24, 2007

The Democrats on Social Security   [Ramesh Ponnuru]

Barack Obama thinks that Social Security’s fiscal shortfall is overblown. He opposes private accounts, benefit cuts, or an increase in the retirement age. He writes:

I believe there are a number of ways we can make Social Security solvent that do not involve placing these added burdens on our seniors. One possible option, for example, is to raise the cap on the amount of income subject to the Social Security tax. If we kept the payroll tax rate exactly the same but applied it to all earnings and not just the first $97,500, we could virtually eliminate the entire Social Security shortfall.

That option would be the largest increase in marginal tax rates in decades—larger than the Bush 1990 and Clinton 1993 tax hikes combined. Obama can claim that this tax increase would “virtually eliminate” the shortfall by defining that shortfall to cover only the next 75 years, by counting all the Social Security surpluses of the last few decades as saved even though they weren’t, and by attributing interest to this unsaved surplus. Drop these assumptions, and this big tax increase would close only 40 percent of the shortfall. (I’m assuming that Obama wouldn’t give high earners bigger Social Security benefits to compensate for their higher taxes.)

Hillary Clinton has ruled out the same proposals that Obama has ruled out—private accounts, benefit cuts, or increases in the retirement age—but she has not floated the idea of a tax increase. In recent weeks, she has claimed that when her husband left office, Social Security was projected to be solvent until 2055. She has added that the projection has been cut to 2041 because of President Bush’s fiscal mismanagement.

That’s not right. In 2000, Social Security’s trustees estimated that its trust fund would remain solvent until 2037. (As it happens, I don’t think this trust-fund solvency question is terribly important but for the sake of argument I’ll go with Hillary’s view that it does.) Now it is indeed estimated to be 2041. Under Bush, we’ve gained 4 years rather than lost 14.

Where did Clinton get the year 2055? In the last years of the Clinton administration, Clinton proposed to count the budget surplus toward Social Security and to have the government invest the Social Security funds in the stock market. It claimed that these moves would get us to 2055. Critics said the plan was based on accounting gimmicks that wouldn’t really make Social Security more secure. Whoever was right, the administration’s plan didn’t make it through Congress.

The interesting question left open: Is Senator Clinton in favor of having the government invest Social Security funds in stocks?

09/24 06:23 PMShare