State of the Union: Social Security

Mr. Bush’s State of the Union speech dealt largely with the Social Security program and the president’s desire to change it. He actually said, “By the year 2042, the entire system would be exhausted and bankrupt” without changes. Mr. Bush is noted for being disinterested in the intellectual side of his job, relying more on his instincts. In other words, he doesn’t do his homework. That character flaw, though, is the only reason one cannot call him a liar. He probably doesn’t know any better.

As discussed in the last issue of this journal, Social Security won’t be bankrupt by 2042. But, the arrangement is difficult to understand for non-wonks, so a quick analogy is in order. Presume a company runs a huge surplus for a decade, and then runs at a loss for a time. At some point, the surplus it earned is gone. Does that mean it’s bankrupt the next year? If it still has revenues, which it can increase, and/or it can cut costs, then of course it isn’t bankrupt. The Congressional Budget Office believes that Social Security can pay out 78% or so of its current after using up its surplus in 2052 (not 2042 as Mr. Bush maintains – a case of not doing his homework). Under this scenario, 100% of payments will use up 100% of revenues, for the rest of time. The only thing that could prevent this from happening is if the payroll taxes weren’t collected.

Mr. Bush’s solution is an ideological, rather than financial, one. An increase in the payroll tax of only a percent or two enacted now would make up that 22% “shortfall” after 2052. Additionally, Mr. Bush could remove the current cap on payroll taxes. Under current law, no one pay a single extra penny on income over around $86,000 per year. Mr. Bush would rather admit that invading Iraq was a mistake than he would raise taxes, especially on the very wealthiest Americans.

The Democrats, though, were handed a problem in the president’s speech, which proves that someone in the administration (perhaps even the top man) knows how to play politics. By guaranteeing that changes wouldn’t affect anyone currently 55 or older, Mr. Bush created an intergenerational wedge. The older folks, the ones who vote in large numbers, don’t have to care what happens to the system. And it is an article of faith among younger Americans that Social Security just won’t be there. So, how to save an effective system when the country has been so precisely split?

What the Democrats haven’t quite grasped is the need to do more than just Social Security for retirement. Half of America’s elderly wouldn’t make it without Social Security, and 20% have no other source of income. That is where the GOP sees an opportunity – and full marks to them for recognizing it. IRAs, Keoghs, 401(k) plans are nascent parts of the solution. The bipartisan solution is right in front of everyone on Capitol Hill. The debate should be about supplementing Social Security, not deforming it.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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