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Phony Social Security Reform: Adding On Entitlements

Beware "add on" accounts on top of the existing Social Security structure, instead of accounts as a replacement for payroll taxes. Add-ons are not real reform; they do not fix long-term solvency; they do not allow for better returns for younger workers; they do not diminish Social Security's burden on the economy; they do not create a true ownership society. Rather, they are merely an additional entitlement.

Beware the add-on account diversion. Although they may seem similar, they are not at all what the President is suggesting. And that's because they are bad policy.

The Wall Street Journal has a great editorial this morning about this misdirection, this red herring, on Social Security reform, and how the President's plan is different (and better):

The main virtue of Mr. Bush's proposal is that it would let individuals keep some of their own payroll-tax money, investing it for higher returns rather than turning it over to Congress to spend the way it is now. With annual payroll taxes expected to exceed annual Social Security benefits through 2018, the earlier these accounts begin the more money can be kept out of Congress's clutches. Think of this as Al Gore's famous "lock box," except that each worker would have his own lock and key.

The same ownership principle applies to the tax-advantaged savings accounts that already exist, namely IRAs and 401(k)s. These too are funded by individuals with their own money (or by private employers out of earnings). These contributions and any growth in assets are shielded from taxes, at least for a time, but the accounts don't receive any direct government transfer payments. A tax exemption is not the same as a direct federal subsidy: The former lets taxpayers keep more of their own money; the latter requires dunning some taxpayers more in order to finance cash payment to others.

The "add-on" concept, on the other hand, has a long liberal pedigree going back to the George McGovern campaign of 1972. The Democratic Presidential candidate proposed a direct government payment to Americans that was widely ridiculed as a "Demogrant." In the Social Security context, add-on accounts gained currency in the 1990s when Robert Rubin suggested them as an alternative to defeat personal accounts financed with payroll taxes.

The add-on accounts, like other "alternatives" proposed by the anti-reform forces, are part of a deliberate plan to muddle and confuse the debate. Don't get lost by these deliberately bad ideas. Don't settle for anything less than personal accounts, funded with part of the current payroll taxes. The discussion of add-ons is a purposive attempt by Democrats to confuse voters about the details of President Bush's plan.

To fund any of these add-ons, Congress would be taking money from general tax revenues. That means raising income or other taxes on some Americans to finance subsidies to others. Meanwhile, the politicians would get to keep spending surplus payroll taxes right through 2018, and they'd also avoid doing anything about Social Security's long-term financing shortfall. South Carolina Senator Lindsey Graham is exactly right to call add-ons "a political cop-out."

The Wall Street Journal is also correct in pointing out that the White House must be more forceful in separating, rather than blurring, the lines between the two types of personal accounts.

Ultimately, there is nothing wrong with individuals creating add-on accounts for their retirement, but those add-on accounts already exist under other names. They are called investment portfolios, 401(k)s, mutual funds, and the like. They are important for individuals, but they do not fix Social Security.

Posted by Will Franklin · 13 March 2005 05:01 AM

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