Friday, May 20, 2005

The "Wexler Plan" shows the bind the Democrats are in over Social Security.

To score a very short term political victory over President Bush (for once) the Democrats now have put themselves in what figures to be a very unpleasant box for the long-term by denying both benefit cuts and real economic investments as reform options for Social Security.

By simple arithmetic that leaves only one remaining possible option: big tax increases -- on top of the other big tax increase already in the pipeline for Social Security and Medicare: a 35% income tax increase on individuals, businesses, everyone (or the equivalent) by 2030 just to finance the operation of the trust funds, plus even bigger and perpetually rising tax increases for Medicare.

So the Democratic party's position today is simply "tax hikes on top of tax hikes" -- which will still leave Social Security participants of the future losing money to it, getting negative returns, even worse than today in fact.

This is represented by the one and only proposal to do anything about Social Security's finances to come from any Democratic politician to date -- that by Rep. Robert Wexler of Florida to impose a new 6% payroll tax on all wages above the $90,000 wage base currently subject to Social Security tax.

The financial results that this would produce for the voters in Rep. Wexler's own Florida district are presented by the good folks at Real Clear Politics, who ask: when those voters finally catch on, how popular is this going to be?

And Wexler's proposed tax increase isn't nearly enough. Remember how Paul Krugman said he opposes extending the full 12.4% payroll tax to cover all payroll because it would make people feel like they've already paid a big tax increase -- thus making it harder to get the real tax increases that are needed! The tax increase that Krugman dismisses there as too small is more than twice the size of Wexler's.

I've been asking here all along about this subject: how politically short-sighted can the Democrats be?

Today, with Social Security still pulling in net revenue for the government, it's easy for them to posture against every proposed reform -- and against benefit cuts for the rich in particular.

But for the future it's the iron law of arithmetic: Social Security is more than 25% underfunded in the long run (not counting the trillions that must be raised to service the trust fund) and as long as it remains "paygo" the only ways to close the funding gap are by raising taxes or cutting benefits -- specifically, cutting benefits for the rich (as nobody is ever going to propose cutting benefits for the poor first, to preserve benefits for the rich.)

Come the 2020s and later, if you don't cut benefits for the rich you will have to raise taxes to make payments to the rich -- there is no way around it.

So the Democrats have placed themselves in the policy box labeled "Raise Taxes on Workers to Finance Transfers To The Rich." And when the day comes that they actually have to vote to it, how popular is that going to be ... among liberals and progressives in particular?

Remember, we're not talking about a time 75 years or 50 years from now, but one well within the working lives of millions of people working today. These workers of today are going to be told then to pony up these tax increases to reimburse the trust fund for the payroll taxes they've already paid over their entire working lives -- in exchange for benefits that will be worth less than just the payroll taxes alone. How popular is that going to be?

If I was a Democrat politician under the age of 45, and thus hoping to still have a viable political career twenty years from now, I'd be actively considering private accounts plus any and all other viable reform options as a way out of this box -- and looking to implement reform as soon as possible too, to minimize its costs both economic and political.

But as things are, 20-odd years from now the tax bills to finance Social Security are going to start arriving in force, and as they do the voters of then are going to remember the mantra of the Democrats of today: "Social Security is just fine even if we do nothing at all for forty years. We've a Trust Fund to pay it!"

And the Democrats of then are going to be put in the position of having to explain this past mantra of theirs by saying...

"Of course, when we told you back then that we needed to do nothing at all for 40 years to preserve Social Security, what we meant by 'nothing at all' was: (a) raising your taxes by one whole lot, or (b) cutting your benefits by the same whole lot -- in spite of our specifically promising never do it, or (c) a combination of both, in only 20 years.

"But you knew that! The arithmetic was perfectly clear then. How can you possibly be upset at us now -- just because your income taxes have risen 80% before the Social Security trust fund has even run out? After all, the Social Security Trustees said they would, way back in 2004, so you knew ..."

And the political question of the day then will be: do the Democrats find a means of avoiding going the way of the Whigs?

Note: Real Clear Politics was a favorite web site during election season -- Viking Pundit reminded us here to visit it between elections too.