Reform Social Security Now or Raise Taxes Later

June 24, 1999

Thus far, the Social Security reform debate has taken place solely among conservatives. Liberals, including the Clinton Administration, have done little more than defend the status quo at all cost. Thus, while they oppose conservative privatization proposals, they have yet to put forward their own reform. There are indications, however, that ultimately liberals will make higher taxes the cornerstone of their Social Security rescue plan.

Liberals know as well as conservatives that the status quo is unsustainable. By 2014, payroll tax revenues will equal expenditures; by the year 2034, Social Security revenues will only pay for 72 percent of projected benefits and the trust fund will be exhausted (see figure). But liberals also know that the longer Congress waits to enact reform, the stronger their position will be. That is because privatization requires a long lead time to implement. Thus by pushing off Social Security reform as long as possible, liberals handicap conservative alternatives.

What will the liberals propose when reform can no longer be put off any further? Signs are that higher taxes will be the main thrust, just as they were during the last big Social Security debate in 1983. At that time, Social Security faced a severe short-term financing problem and action had to be taken quickly. So even though the Social Security rescue plan was drafted by conservative Republican Alan Greenspan, now chairman of the Federal Reserve Board, two-thirds of the financing gap was closed with higher revenues.

The Social Security Administration is already looking at various tax alternatives.

• According to a May 18 memo, the main option under review appears to be elimination of the Social Security wage cap, so that payroll taxes would apply to all earnings rather than the first $72,600 as is the case now.

• By not crediting the higher taxes toward higher benefits, this move eliminates 98 percent of the Social Security deficit for the next 75 years.

• Another option would raise the cap so that 90 percent of all earnings would be taxed.

The virtue of expanding the tax base, rather than cutting benefits, is that almost all of the burden falls on the wealthy. According to the memo, three-fourths of the burden would fall on the top quintile, those with incomes above $51,918. By contrast, most benefit reduction options, such as reducing cost-of-living raises or raising the retirement age, impose a disproportionate burden on the bottom quintile, those with incomes under $7,907.

Already, liberal Senator Ted Kennedy, Massachusetts Democrat, is pushing for lifting the Social Security wage cap. The longer conservatives wait to press an alternative, the more certain it is that the Kennedy approach ultimately will be adopted.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 14, 1999.

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