Daily Debunker

March 21, 2005

U.S. Senate Democrats have remained surprisingly united — with some notable exceptions — in their opposition to President Bush's Social Security reform proposal. But by systematically removing one idea after the next from the negotiating table, Senate Democrats have talked themselves into supporting a massive tax increase that would certainly cost jobs and would probably cost them politically.

First, almost every Democrat in the senate signed a letter condemning borrowing as a way to pay for Social Security reform. The letter reads in part:

"Soon after your reelection, you made clear that your Administration's top priority is to move toward the privatization of Social Security. Your proposal would cut Social Security's funding by diverting payroll taxes into privatized accounts, which would weaken the program and force deep cuts in benefits. Your Administration also acknowledged that the proposal would require borrowing trillions of dollars, much of which we know would come from foreign countries like China and Japan.

"Democrats in the Congress believe this approach is unacceptable, and it appears that most Americans agree with us. Funding privatized accounts with Social Security dollars would not only make the program's long term problems worse, but many believe it represents a first step toward undermining the program's fundamental goals. Therefore, so long as this proposal is on the table, we believe it will be impossible to establish the kind of cooperative, bipartisan process we need to truly address the challenges facing the program many decades in the future."

Then, on March 15th, Senate Democrats put forward a resolution condemning benefits cuts.

"President Bush's plan to overhaul Social Security fared poorly on Tuesday in a test vote on Capitol Hill, with the Senate splitting 50 to 50 on a nonbinding measure declaring that Congress should reject any Social Security plan that would require 'deep benefit cuts or a massive increase in debt.'"

Forget for a moment that doing nothing is a de facto benefit cut of 27% for future retirees. The real concern here is that Democrats have left the door open to only one "reform" option: a tax increase.

This tax increase could come in one of two ways. Congress could vote to increase the percentage of the payroll tax on income used to finance Social Security. But President Bush has already condemned such action and would surely veto it.

Or Congress could keep the payroll tax at its present level (12.4%) but raise the cap on wages to which it is applied. Presently, payroll taxes only apply to the first $90,000 of workers' incomes. While the idea of raising taxes on workers who make over $90,000 a year has populist appeal, it would ultimately have a disastrous effect on the nation's economy. Many millions of these workers are self-employed small business owners who are required to pay both the employee and employer portions of the tax. Raising the wage cap would cripple their ability to grow their businesses and hire new people.

Worse still, even if Congress eliminated the wage cap altogether, it would buy only seven additional years of solvency, according to the Social Security Administration. Which means after one of the biggest tax increases in American history, they'd be right back to the drawing board seven years hence.