The 2% Solution To Fix Social Security

Restore the pre-Bush tax rate on the very richest U.S. taxpayers

By Robert Kuttner

President George W. Bush's initiative to make Social Security partly private is in startling disarray. In recent days prominent Republican legislators have publicly distanced themselves from the Bush approach. A basic problem is that privatization is expensive, because it diverts payroll taxes to a new system of private accounts. But any strategy of paying for it alienates one key bloc of Republicans or another.

If you pay for the transition by borrowing an estimated $2 trillion, fiscally prudent Republicans balk. If you cut benefits, as Bush aides have suggested, another batch of GOP legislators will resist. And if you raise taxes, as House Ways & Means Chairman Bill Thomas uncharacteristically proposed, still other Republicans desert. Virginia Representative Tom Davis, who heads the Republican Congressional Campaign Committee, has publicly declared that the whole thing is dubious politics, because it risks losing Republican House seats in 2006.

IN CONTRAST TO EVERY other major Bush initiative, few if any Democrats in Congress are willing to provide bipartisan cover. House Majority Leader Tom DeLay may have been too clever by half when he used the gerrymander to oust Representative Charles Stenholm of Texas, the leading (and perhaps only) Democratic supporter of privatization. In the Senate, where Montana's Max Baucus, the ranking Democrat on the Finance Committee, often gives Bush bipartisan backing, there are no Democrat defectors so far.

Bush's predicament is so serious that Republicans who normally loathe tax increases are suddenly talking about raising income subject to Social Security taxes in the hope of luring a few Democrats to support the Bush plan. But they have no takers. The White House nominally has the votes, since Republicans enjoy majorities in both houses of Congress. But without bipartisan cover for a vote that risks voter backlash, Republicans won't walk this plank.

Bush is also getting increasingly skeptical press coverage on his central contention -- that the existing system is in dire crisis. Since 1997, the Social Security trustees (a majority of whom are now Bush appointees) have pushed back Social Security's supposed day of reckoning, when it won't be able to pay all its benefits, from 2029 to 2042. In other words, in seven years the system has gained 13 years of health, mainly because the economy has grown much faster than anticipated. And the Congressional Budget Office, with more realistic economic assumptions, puts the date at 2052.

So how will all this play out? Bush's idea of individual accounts is attractive. All Americans want nest eggs, and they should have them, but not at the expense of Social Security, which is the one part of the retirement system absolutely guaranteed against market risks.

Fixing Social Security's actual shortfall, which is about 0.4% of gross domestic product over the next 75 years, according to the CBO, is actually pretty easy. One politically risky way would be by raising the cap on the payroll tax, from $90,000 of income, to about $140,000, as floated by the AARP and accepted in principle by Senator Lindsey Graham (R-S.C.) and Representative Jim McCrery (R-La.), who heads the House Social Security subcommittee.

The workers' share of the Social Security tax is 6.2% of wage and salary income. If we raise the cap, a person earning $140,000 would face a tax increase of more than $3,000. It's hard to imagine either party proposing a major tax hike on the upper-middle class.

There's a much better way. Roughly the same amount of revenue, about $60 billion a year in current dollars, could be raised by restoring the pre-Bush income tax code on just the top 1% of taxpayers. Then, set up a system of universal, portable, supplemental pension accounts by restoring the pre-Bush income tax code on the second-wealthiest 1%. That would generate roughly an additional $45 billion in current dollars. This money could be used as a government match, on a sliding scale, to encourage all Americans to set up private accounts. Remember, 98% of Americans would get no tax increase.

Each party would gain something. The Democrats would strengthen the existing system. The Republicans could take credit for setting up a system of universal individual accounts. Bush might not accept a bipartisan deal. But if he holds out for privatization financed by a raid on the existing Social Security system, he could well face his first big defeat.

Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.

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