A witches' brew of alternatives to Social Security privatization: opponents' proposals call for tax increases, benefit cuts, and/or government investing.

• Author: Tanner, Michael
• Position: Economics

WHILE PROPOSALS for privatizing Social Security havebeen much debated, there has been far less discussion of the alternatives. Indeed, opponents of privatization often critique it as if such proposals existed in a vacuum. Critics compare privatization proposals with "current law" and suggest that they will provide lower benefits or at least lower government-provided benefits. Or, they suggest that the costs of transition to a privatized system will require tax increases. However, as Charles Blahous, executive director of the President's Commission to Strengthen Social Security, has pointed out, "The essential problem with comparing reform plans with `current law' is that `current law' allows the system to go bankrupt."

Impending bankruptcy is not the sole problem facing Social Security. Payroll taxes are already so high that younger workers will receive an extraordinarily poor rate of return. In addition, Social Security contains a host of inequities that penalize working women, minorities, and low-income individuals.

Most critics of privatization focus only on insolvency. They implicitly assume that the structure of the current program is fine and the changes needed are merely in its financing. Therefore, the solutions they offer generally do not deal with establishing property rights, making benefits fairer to women and/ or minorities, allowing low-wage workers to accumulate wealth, or even increasing rates of return. Yet, even judging by their own limited standards, opponents of privatization offer few concrete proposals.

Pres. Bill Clinton identified the limited range of options available to restore Social Security to solvency: raise taxes, cut benefits, or get a higher rate of return through investment in real capital assets. Henry Aaron of the Brookings Institution, an opponent of privatization, agrees. "Increased funding to raise pension reserves is possible only with some combination of additional tax revenues, reduced benefits, or increased investment returns from investing in higher yielding assets," he told Congress in 1999.

The question, then, is, since opponents of privatization have rejected individual investment to earn a higher rate of return, which of the other alternatives do they support--raising taxes, cutting benefits, or some nonindividual form of investment?

As Reps. Jim Kolbe (R.-Ariz.) and Charles Stenholm (D.-Tex.) pointed out in a letter to the bipartisan Congressional leadership in November, 2001, "All participants in the debate over the future of Social Security must be held to the same standard so that the different approaches to strengthening Social Security can be compared on a level playing field."

Nevertheless, few, if any, opponents of privatization have put an actual scoreable proposal on the table. Indeed, the President's Commission to Strengthen Social Security specifically invited opponents to submit detailed proposals for reforming the system, offering to have those proposals scored by the Social Security Administration on the same basis as the commission's own proposals. Yet, no opposition group chose to take advantage of the offer.

Still, from their writing, testimony, and speeches, it is possible to piece together what opponents of individual accounts offer as an alternative. Generally, those proposals boil down to some pretty unpopular choices--tax increases, benefit cuts, or government investing. All of them contain significant costs and risks for individuals and the American economy alike.

Tax increases

Not surprisingly, since their primary goal is to preserve the structure and benefits of the current system, the solution most commonly offered by opponents of privatization is some form of tax increase. The National Academy on an Aging Society suggests that there is no limit to the amount of taxes American society can bear if they are used for a good cause such as preserving Social Security. It specifically rejects the notion, widely accepted by economists, that total taxes should not exceed 20% of national income.

Joseph White, a fellow with the Century Foundation and professor of public policy at Case Western University, takes a similar approach. In his 2001 book, False Alarm: Why the Greatest Threat to Social Security and Medicare Is the Campaign to "Save" Them, he argues: "We have a responsibility to maintain a decent society. Social Security and Medicare are part of that. We have a responsibility not to confuse solving the government's problems (by cutting its expenditures) with solving society's. No matter where we started, cutting Social Security and Medicare would be good for the budget. Eliminating them would be better. But the government does not exist just for its budget. The government exists to make the country a better place to live. Social Security and Medicare do make this a better country, and they can and should be preserved from the attack on entitlements."

Ken Apfel, Social Security commissioner under Clinton, says that successful Social Security reform will require Americans to abandon the notion that "future tax revenues should not be increased--even modestly." He warned in an Apr. 11, 2001, op-ed piece in the Washington Post that, "over the next several decades Social Security taxes are projected to decline by more than 10 percent as a percentage of GDP. With a doubling of the senior population, more revenue will be needed, not less."

Lisa Maatz, formerly of the Older Women's League, argues that, "while not a favorite of most taxpayers, [tax increases have] a place in the solvency discussion. If it helps to preserve the universal nature of Social Security, where no individual is left to sink or swim on their own, it may be worth the cost."

This is ultimately the point, an admittedly philosophical one, of those who would raise taxes to preserve Social Security. They see Social Security as a good thing, and, therefore, in their view, we should be willing to pay whatever it takes to preserve the program in its current form.

The first place to look for tax increases is the payroll tax itself. For example, Vincent Sombrotto, president of the National Association of Letter Carriers, has urged the President's Commission to "reject the notion that taxes can never be raised to overcome the projected shortfalls in the Social Security Trust Fund. If Americans are living longer, why shouldn't we pay higher payroll taxes to handle it'?"

Former Social Security Commissioner Robert M. Ball, writing for the Century Foundation, proposes "moderately" increasing future payroll taxes. Jeff Faux of the Economic Policy Institute would not only raise payroll taxes, but would index them to future increases in longevity. Various levels of payroll tax increases are also supported by University of Notre Dame economist Teresa Ghilarducci, Mark Weisbrot of the Center on Economic and Policy Research, and Robert Myers, former chief actuary at the Social Security Administration, who suggests that they would not be "too terribly painful."

The tax increase needed to restore Social Security to solvency is extremely large. To maintain benefits after the system begins running a deficit in 2016, the government must acquire new funds equivalent to $103 per worker. By 2030, the added tax burden increases to $1,543 per worker, and it continues to rise thereafter.

Tax increases of this magnitude would have a serious impact on the U.S. economy. A look at the last rounds of payroll tax hikes shows how increasing payroll taxes can destroy jobs and reduce economic growth. For instance, according to the Congressional Budget Office (CBO), hikes between 1979 and 1982 resulted in the permanent loss of 500,000 .jobs.

A study of the 1988 and 1990 payroll tax increases by economists Gary and Aldona Robbins estimated 510,000 jobs lost permanently and a reduction of the U.S. gross domestic product (GDP) of $30,000,000,000 per year. The reason for this is that workers view payroll taxes as a "pure.tax," not as an investment. Higher payroll taxes...