Two years ago, Bush was so eager to enact personal accounts that he signaled his openness to tax increases to get them. If personal accounts are off the table, the tax increases should be, too. That leaves three possible areas for cooperation.

First, the program could be put on a sound fiscal footing by reducing the future growth of benefits. Republicans will like this proposal better than Democrats, but few Democrats have ruled it out. Second, the government could provide tax credits to help low-income workers begin investing. Democrats have proposed this policy for years, and Republicans have objected. But if Republicans are as interested as they say they are in expanding the investor class — and they should be — they should drop their objections. Third, the taxes that fund Social Security could be made more progressive. There is a cap on the amount of wages that is subject to the payroll tax. That cap could be raised. This is where Democrats want to go, and Republicans have good reasons for resisting: It would increase marginal tax rates for the affected workers quite a bit, and it would not raise much money. But if the cap were not raised much, and the revenues gained were used to fund the tax credits or to lower the payroll-tax rate, Republicans might find their objections dwindling.

Some conservative commentators suggest that the current composition of Congress makes any attempt to reach a deal on Social Security impractical, even foolhardy. If Democrats are unwilling to embrace personal accounts financed from payroll taxes, these pundits reason, then it would be best to wait and address the issue when reform-oriented conservatives possess the requisite political control. Although this reasoning is superficially compelling...[t]he same arithmetic that makes current promises unaffordable will soon make amending those promises politically unfeasible.

...Measured as a percentage of the economy, Social Security benefits are scheduled to grow by 47 percent over the 75-year actuarial window. The problem is that 85 percent of this increase is forecast to come within the next 20 years...

In 2005, the President explicitly omitted workers over the age of 55 from any changes proposed to Social Security. Yet the over-55 cohort was the group most opposed to personal accounts (56 percent to 29 percent), and any other changes to the program. Does anyone really believe Congress will have a greater appetite for reform when the share of the putative AARP vote is twice as large as it is today?...As Social Security’s finances worsen, so too will chances for a constructive resolution to the problem. When policy options dwindle and the political obstacles to reform become insurmountable, a cumulative string of punishing tax increases becomes the path of least resistance, as the experience of the European social welfare states illustrates.

Time is not on the side of those who wish to solve this problem without massive tax increases. Some conservatives need to gain a better appreciation of this fact.

Ayn Rand didn't make the list -- though it's hard to think of too many more influential twentieth century intellectuals. But in a sidebar list of "Influential Architects," Rand's greatest character, Howard Roark, is honored -- the only fictional person to make any list.

Posted by Donald L. Luskin at 9:02 PM | link    

Sunday, December 03, 2006

Posted by Donald L. Luskin at 12:07 PM | link