More on Personal Accounts

First, let me make a correction. In one of my previous posts (3/04/05), I prematurely delivered kudos to Senator Lieberman for being willing to work with the President. I have since learned that he joined some forty other Democrat senators and Independent Jim Jeffords in signing a letter to President Bush that essentially says private accounts are off the table as a bargaining point: so much for working with the President. My respect is thus retracted. Those Democrats who did not sign the letter: Kent Conrad, Russ Feingold, and Nebraska senator Ben Nelson (aka “the Bennator” – to borrow President Bush’s term). Sorry you were not mentioned instead, Senator Nelson.

True enough, private accounts will not immediately address shortfalls in the social security program. In fact, diverting some payroll tax revenues to private accounts will cause additional shortfalls, which must also be addressed. However, private accounts shift funding for a portion of the social security program away from depending entirely on later generations to fund benefits for current retirees. We cannot expect such an important and desirable funding change to occur painlessly.

This leaves tax increases and benefit cuts as possible means to address these shortfalls. The politically expedient approach may well be to raise the base for social security taxes, which will affect only those earners with more than $90,000 (2005) in earnings. I have discouraged this move in a previous post (see 2/25/05). However, the numbers of affected voters, combined with the significant revenue sources available, may make this irresistible to a majority of the Congress.

Consider this as well: the demographics for most folks with the earning power to be affected by an increase in the social security tax base are likely to include older voters. (Though my kids may differ with me, I’m speaking of middle-aged folks.) The earning power necessary to become a maximum earner on the social security scale often does not occur until later in life, when experience is paying off in the marketplace.

I haven’t checked the population statistics on this demographic point, but assuming it is true, these upper-earning, middle-aged folks will face a double-whammy under most reform packages: they will not only bear the burden of tax increases in the form of a higher wage base, but they will also not get the benefit of having a private account for some of those funds. (This will be especially true under Senator Hagel’s plan, which limits participation in private accounts to those under 45.)

So, older members of the baby boomers, prepare to pay. When counting the votes, it may be difficult for politicians to resist putting the burden for change on your group. This will mean the hard-fought changes in income tax rates, which saved you a few percentage points at tax time, will be more than overcome by social security tax increases.

EAM