Ross Douthat Argues that Social Security Would be Easier to Cut If It Were Changed from a Social Insurance Program to a Welfare Program

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Sunday, 25 November 2012 08:14

Ross Douthat argues convincingly that if we eliminated the link between contributions and benefits it would be much easier politically to cut Social Security. Of course he thinks ending the link would be a good idea for that reason, but his logic is certainly on the mark, people will more strongly protect benefits that they feel they have earned.

Douthat is off on a few other points. He tells readers:

"In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.

"What’s more, the payroll tax as it exists today can’t cover the program’s projected liabilities anyway, and the pay-as-you-go myth stands in the way of the changes required to keep Social Security solvent."

The problem here is that we are not condemned to an era of "mass unemployment, mediocre wage growth and weak mobility." This has been the outcome of inept macroeconomic policy and trade and regulatory policies that were designed to redistribute income from those at the middle and bottom to the top. Most people would look to reverse these policies rather than eliminate social insurance.

The implication of this comment, that we would somehow be able to make up substantial funding shortfalls from cutting taxes on low and middle income people by taxing the wealthy more also is not very plausible. Given the enormous political power of the "job creators" (as demonstrated by the fact that people are not laughed out of town for using this term), it is unlikely that substantially more money will be raised from the wealthy to pay for Social Security. This means that in Douthat's dream world we would be seeing large cuts in benefits.

He also is wrong with his arithmetic. The payroll tax certainly can cover the program's expenses. In fact, had it not been for the upward redistribution of income over the last three decades, which nearly doubled the share of wage income going over the cap on taxable income, the projected 75-year shortfall would be about half of its current level.

Even with the current projected shortfall, if ordinary workers shared in projected productivity growth over the next three decades, a tax increase equal to 6 percent of their wage growth over this period would be sufficient to make the program fully solvent. The problem is clearly the policies that led to the upward redistribution of income (e.g. protectionist policies for higher paid professionals, stronger patent and copyright monopolies, subsidies for too big to fail banks etc.), not Social Security.

It is worth pointing out that when Douthat proposes "means-testing for wealthier beneficiaries," his notion of wealthy means school teachers and firefighters, not Bill Gates and Mitt Romney. There are a small number of very rich people, cutting some or all of their benefits won't make any difference to the program's finances. In order to have any appreciable effect on Social Security's finances it would be necessary to cut benefits for people who earned $40,000 a year or thereabout.  

Finally, Douthat refers to "changing the way benefits adjust for inflation." Douthat is not interested in "changing the way benefits adjust for inflation," he is interested in reducing the way that benefits adjust for inflation. The most widely touted proposal would be equivalent to a 3.0 percent cut in lifetime benefits. This would have a larger impact of the income of most beneficiaries than the ending of the Bush tax cuts would on the after-tax income of most of those affected. For this reason, it is understandable that there would be resistance just as there is considerable resistance to "changing" the tax rate for high income taxpayers.