Democras are not entirely unwilling to propose a solution to Social Security:
Al Gore's 40% Tax Hike
The vice president's Social Security plan isn't as bad as it sounds. It's much, much worse.
BY SUSAN LEE
Monday, September 11, 2000 12:01 a.m. EDT
Last week I found myself trying to understand Al Gore's Social Security reform. (I know, it's an exciting life.) The plan comes in two parts. One does absolutely nothing about the impending boomer crunch except to make it worse, but the other made my hair frizz.
The scary part is called Retirement Savings Plus (although the money can also be used to pay for college or buy a house). It provides for individual savings accounts but--oh, mama--listen to how Mr. Gore wants to fund them.
As I read it, everybody and anybody who earns less than $100,000 a year could set aside some of their own money and then have government step in with a big fat subsidy to total $2,000 a year a person. Lower-income people could contribute up to $500 a year and have government match every dollar with $3. Middle-income people could set aside $1,000 and have government match every dollar with another dollar. And upper income people could plop down $1,500 and get 33 cents for every dollar.
Since this sounded like one gargantuan giveaway, I wondered--as you probably are--how much this would cost. Well, I phoned John Cogan, an economist at the Hoover Institution and the fastest numbers man in the West. Mr. Cogan is also advising the Bush campaign, so I figured he would have the figures. He was ready for me.
Using Internal Revenue Service data, Mr. Cogan estimates that more than 100 million people would be eligible and, if they all maxed out on government money (which of course is money that originally belonged to you and me), the total tab would come to $160 billion. That's correct--$160 billion for one year, or roughly 16% of current federal tax revenue.
I started making shrieking-type noises, but Mr. Cogan--who is fair and calm--pointed out that not every eligible person would participate. So, assuming the same rate as the rate for people who elect to participate in private pensions (about 75%), Mr. Cogan tap-tapped on his calculator for a new number. And it wasn't all that comforting, either--$120 billion, or 12% of federal tax revenue.
Is Mr. Gore out of his mind? Maybe. At the very least, he must be mathematically challenged. He has estimated the cost of his program at $35 billion.
So I asked Mr. Cogan what the deal was. Again, in his typically fair and calm fashion, he speculated that Mr. Gore, quite possibly, has not fully disclosed his restrictions on eligibility. A Gore aide did mention last week that people earning less than $5,000 a year, full-time students and retired people would be excluded. But, as Mr. Cogan noted, those exclusions aren't sufficient to even come close to $35 billion.
Instead, Mr. Cogan offered a scenario that the Gore camp may have in mind, given the fact that lower income people would have difficulty in ponying up $500 a year. Mr. Gore's $35 billion would be consistent with a plan in which only 5% of lower-income households and 50% of middle- and upper-income households participate.
Simply put, no matter how one slices and dices the numbers, the only way to get the numbers down to Mr. Gore's estimate is to exclude those who really need the boost.
But there's more. Remember the other part of Mr. Gore's Social Security reform? The one that just leaves the system unreformed? This part calls for government to use the Social Security surplus to pay down the debt, thereby saving on interest costs. These savings would be used to "buy" government bonds that would be put in a "lock box" until the boomers start to retire and the system faces bankruptcy. So how much are we talking about? Mr. Cogan's lowest estimate is $34 trillion.
More shrieking from me. But, as Mr. Cogan pointed out, the exact figure really doesn't matter. This scheme is just pie-in-the-sky, since no assets are created (printing up bonds is just a paper transaction). So what happens when the bill for Social Security becomes due? Mr. Cogan, still remarkably fair and calm, said that there were three choices: Either taxes would have to be raised by 25%, or benefits would have to be cut by 25%, or the bonds would have to be rolled over for another generation of taxpayers to redeem by--you guessed it--paying more taxes or enjoying less benefits.
In other words--and I was really squeaking here--Mr. Gore's retirement plan will generate a total tax increase of 37% to 41%? "Call it 40%," said Mr. Cogan.
I was speechless at this point, so Mr. Cogan added that he thought the whole thing was a liberal fantasy, and there was no way that Mr. Gore could enact such an enormous entitlement program. Well, I think Mr. Cogan is being just a little too fair and a little too calm. The inventor of the Internet has had one fantasy too many for my taste.
Ms. Lee, an economist, is a member of The Wall Street Journal's editorial board. |
