No Easy Way to Fix Social Security

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This is coming up over and over again--an "easy" fix for Social Security wherein "all" we have to do is get rid of the cap on Social Security payroll taxes, without increasing benefits.  Dylan Matthews has the charts that are currently making the rounds, which show that this simply solution not only eliminates the Social Security shortfall, but also generates a substantial surplus!

This is not actually surprising, since what this amounts to is hiking the marginal tax rates on high incomes by 15 percentage points--making the federal tax take on the highest incomes 55% in 2012, assuming that Obama and Congress follows through and allows the Bush tax cuts to expire in 2011. 

This is obviously a gigantic hike, and moreover, when Medicare, state, and local taxes are added in, would push the tax burden on the highest incomes to over 2/3 in the hightest tax jurisdictions.

Whatever you think of this plan, this is not an easy solution.  It would be fought bitterly in Congress; it would cause high earners to put enormous effort into generating income in forms (capital gains) that are not subject to payroll tax; and at that level, you would start seeing serious avoidance activity, as well as possibly simply diminished effort.  The fact that the Laffer Curve does not apply at current levels does not mean that it doesn't apply at any level.

Liberals who think this nonetheless sounds pretty swell should also reflect upon the fact that this would suck up any room they have to propose new spending funded by tax increases on the rich.  If this is how we decide to pay for Social Security, every single other social program ever proposed would have to be paid for with either unpopular program cuts, or tax hikes on the middle class.  Moreover, overruns in existing programs, such as . . . oh, I don't know, just off the top of my head, our new health care entitlement . . . would also have to be paid for this way:  cut the program, cut another program, or tell average voters that it's time for another hefty tax hike.  This wouldn't make it very easy for Democrats to get elected.  More importantly, is Social Security so fantastic that you want to use up the funds that could pay for other social programs?  We're running up against real, hard limits on what we can spend, and it's time to make choices.  Is this a good one?

I confess, I fail to see the liberal romance with Social Security.  I don't mean the notion of making sure that old people don't go hungry.  I mean an attachment to Social Security in its current form so strong that it interprets any change in benefit levels as tantamount to implementing an ice floe strategy.  The program was implemented in 1935.  What are the odds that its structure and retirement age are suitable for the current era?

I am strongly in favor of generous progressive programs to care for the indigent and disabled.  But surely it's at least arguable that there are better ways to provide for most peoples' old age than a massive government-run system whose PAYGO structure would be criminal fraud if it had been implemented by a private firm?  I mean, I understand the arguments that "a program for the poor is a poor program." I don't agree with them, but I understand them, and I think the worries are legitimate.  But so is the conservative argument that we can't make everything a universal entitlement in order to make sure that the poor get a little bit of the action.

Given the problems of paying for all this--and yes, Europe is having the same (or worse) problems--it seems to me that American progressives are going to have to think at least some of their committments to universal programs.  You can probably have any of them--but you can't have all of them.  Keeping Social Security just as it is means not doing a lot of other things that progressives want, because the pockets of the rich are not a bottomless resource.  Given the dramatic increase in active life expectancy since the program was implemented, Social Security seems like it should be pretty far down the list of "programs that must be kept exactly as they are at all costs."

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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