TCS Daily

Debate and Demagoguery

By Arnold Kling - January 6, 2005 12:00 AM

"The administration floated a proposal to cut benefits to future retirees by changing the way those benefits are calculated. And these cuts are guaranteed -- whether you opt in to the Bush plan or not.

Here's what the Bush plan will mean for your retirement:

* If you retire in 2022, Bush will cut your benefits by almost 10 percent.
* If you retire in 2042, Bush will cut your benefits by more than 25 percent.
* In 2075, our children and grandchildren will face a staggering cut of 46 percent to their benefits."

-- Democratic National Committee

[note: the above appeared on the main DNC web site during the first week of January, 2005, and was contained in an email sent by the DNC. No permanent link is currently available, but the same analysis can be found here.]

The Democratic National Committee memo above refers to a proposal, also discussed at TCS by Bill Sterling, to change the Social Security benefit-calculation formula to index benefits to prices rather than to wages. As Sterling points out, because of productivity growth wages tend to rise faster than prices, so that such a change would slow the growth of Social Security benefits. This means that the DNC's analysis of the change is largely correct, although the exact outcome will vary depending on economic events.

How should a citizen react to this threatened reduction in future benefits? I have three words: Bring. It. On.

Under the status quo, inflation-adjusted benefits continually increase. In Washington-speak, changing the formula so that benefits only go up with the rate of inflation represents a "cut." So be it.

Future benefits that are promised under the current system are higher than what can be covered by taxes under current law. That means that either benefits have to be cut or taxes have to be raised. The status quo is not sustainable. If you are planning to retire in 2022, 2042, or 2075, either your benefits have to be cut or your taxes have to be raised. Those are your choices.

A Test of Responsibility

Changing the indexing formula is a solution to the Social Security funding gap that is favored by many economists, as I pointed out here. More recently, Bruce Bartlett described the change to price indexing this way:

"Estimates show that just keeping real benefits unchanged -- they would still be indexed for inflation -- would allow Social Security benefits to be paid forever with no increase in tax rates. Future retirees will get exactly what current retirees get in inflation-adjusted terms. They just won't get more, as they will under current law.

"If I were a Democrat, I would support this reform and thus get the whole issue of Social Security's solvency off the table. This would force Republicans to justify private accounts on their own terms, rather than as a cure for Social Security's long-term deficit. If Republicans don't go along, it would prove that they aren't interested in saving Social Security, but instead have another agenda."

In fact, a reasonable test to give each political party is this: what specific proposal do you have for eliminating the Social Security funding gap? If the Democrats propose a specific tax increase plan, such as the Diamond-Orszag proposal (see the analysis by Victor Davis), then they will be acting responsibly. Conversely, if the Republicans were to back away from their proposal to change the indexing formula, they will be acting irresponsibly.

As it stands today, the Republicans are showing more responsibility than the Democrats. The Republicans are being clear about how they will address the Social Security funding gap. The Democrats are not.

The excess of promised future benefits over likely future tax revenues is something that needs to be addressed. One party seems prepared to step up to the plate, address the issue, and take the political heat for doing so. When the Democrats come forward with their tax-increase alternative, then we can have a real debate. Until then, it's just demagoguery.


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