Saving Social Security

By Megan McArdle

This article by Paul Starr makes the central error that comes over and over again in liberal analyses of Social Security*: it acts as if the general budget problem arrives at the same time as social security's budget problem.

This is wrong. The budget problem isn't in 2041; the budget problem is now. Sometime after next year, the Social Security surplus will shrink, starting to put pressure on the budget. Democrats trying to implement spending plans will start to find their tax increases eaten, not by national health care, but by seniors. By 2011, the problem will be large. By 2017, money will be flowing from the general fund to social security. By 2025, the hole will be about as big as it's going to get. Around about 2015, social progressive plans will be DOA. Republican tax schemes will be DOA. The only thing we will talk about for the following 15 years is where to find the money to pay for Social Security and Medicare.

Nor can we save money on Medicare as national healthcare advocates have suggested; aside from fairly trivial savings on pharmaceuticals which are likely to cost money in the long run by stifling innovation (drugs save money by replacing expensive procedures), Medicare already has all the advantages we've been promised in a national system. Its costs are still skyrocketing.

The problem that Starr identifies is real, however: raising the payroll tax cap is an enormous tax increase on high earners. You can have that, or you can repeal the Bush tax cuts; if you do both, you're talking about a marginal tax increase of more than 20 percentage points. I know I keep pounding the point that at American levels of taxation, the Laffer curve promise of higher revenue on lower rates doesn't apply. Well, at 55%, it's plausible to believe that it *does* apply. There is a limit to how much you can raise taxes on the rich.

But where he's wrong is to think that Democrats have some choice in the matter. They don't. They, like their political opponents, are going to see most of their dreams crash on the shoals of the Baby Boomer retirement.


* The mirror-image conservative error is thinking it matters whether the Social Security Administration is technically solvent

This article available online at:

http://www.theatlantic.com/business/archive/2007/11/saving-social-security/2216/