Sunday, July 27, 2008

McCain: Social Security Tax Hike On The Table

ABC News reports a possible recalibration of Sen. John McCain's approach to Social Security reform:

Sen. John McCain made clear this weekend that when it comes to fixing Social Security, "everything is on the table," including a possible payroll tax increase.

"There is nothing I would take off the table. There was nothing I would demand," McCain told ABC News' George Stephanopoulos in an exclusive interview on "This Week." "I think that's the way that Ronald Reagan and Tip O'Neill did it -- and that's what we have to do again."

When asked if that includes a possible hike in the payroll tax, McCain reiterated that nothing -- including such a tax hike -- is "off the table."

"I don't want tax increases. Of course, I'd like to have young Americans have some of their money put into an account with their name on it," McCain said.

This will provoke protest from some, who think that tax increases should never even be considered, and others, who will simply view it as a flip-flop.

For myself, I don't see an inconsistency between Sen. McCain saying he opposes tax increases for Social Security but is willing to talk to people who favor them. (Similarly, my main beef with Sen. Obama's plan to levy taxes on earnings above $250,000 isn't the policy – though I don't particularly like it – it's that he's portrayed it as meaning he could rule out benefit reductions or increases in the retirement age, which isn't the case.) It's important to distinguish what we favor and oppose from things that are "must haves" or "can't haves." In the 2005 reform debate, the Democratic leadership considered personal accounts funded from payroll taxes a "can't have," so much so that they wouldn't discuss anything unless they were taken off the table. Many Republicans have a similar view toward raising taxes to fix Social Security. While I favor personal accounts and oppose tax increases, refusing to talk unless options you oppose are taken off the table is a recipe for inaction, and the longer we put off taking action the more difficult the problem will be to solve.


Bruce Webb said...

It is only fair to point out that President Bush was just as intransigent on the tax front. For example the 2005 State of the Union address included this:

"I know that none of these reforms would be easy. But we have to move ahead with courage and honesty, because our children's retirement security is more important than partisan politics. (Applause.) I will work with members of Congress to find the most effective combination of reforms. I will listen to anyone who has a good idea to offer. (Applause.) We must, however, be guided by some basic principles. We must make Social Security permanently sound, not leave that task for another day. We must not jeopardize our economic strength by increasing payroll taxes".

Not a lot of wiggle room or 'everything is on the table' there.

Andrew G. Biggs said...

I'd have to find a link, but I know that during the reform debate of 2005 the administration said that it wouldn't rule out raising the tax max, although they still wouldn't budge on the rate. Given that most Democrats favored raising the tax max, and that Bush's plan for progressive indexing also stuck it to high earners on the benefit end, he showed some flexibility here.

That said, both sides (then and now) have shown inflexibility, and that's made it harder to get things done. You need to see all the provisions together to weigh whether the package itself is acceptable. There's no single provision that's either so good or so bad that it's worth sinking a total reform package over it.

Bruce Webb said...

Well I have argued consistently over at AB that whether intended or not any increase in the cap inadvertently or not just serves to undermine support for Social Security among the affected classes, particularly if the increase is limited to wage income rather than all income. That an increase can be progressive over the whole category of wage earners and yet still have a regressive effect over all income earners (by essentially taking a societal imperative and funding it via a narrow slice of income earners that doesn't by and large include the real wealthy) is a notion that most of my fellow lefties can't get their minds around.

And I have equally argued that one plausible reason that promoters of personal accounts don't want to talk rate increases is that the amount needed was just not that big in 2004 and if we were using equal assumptions on assumed interest (2006 change) and immigration (2008 change) would still be riding right about 1.9% of payroll. Which depending on what one's views about the real incidence of the employer match might mean a system fixed as is for as little as a 1% reduction in gross wages. I suspect most working people would grab that deal if they knew it existed as a possibility.

Certainly a tax only approach doesn't get you to 'sustainable solvency' but it is far from clear why workers making under the median would care much. This might seem to be a callous 'stick it to the rich strategy' but really a lot less callous then say Fred Thompson's one time plan of closing the whole gap through benefit cuts. That arrow of callousness can and should point both ways as we examine the broad range of possible compromise.

For example LMS leaves me cold because almost all the cost is stuck on one side of the income divide while most of the benefit goes long term to higher income workers in the form of reduced future transfers from the General Fund, in effect a future income tax cut financed by a package of immediate payroll tax increases plus future changes in the benefit formula all to the detriment of wage workers.

Over at AB we have kicked around the notion of having workers simply taking the hit with some balance of tax increases and phased in benefit cuts equal to the current payroll gap and then adjusting both sides of the equations as actual numbers come in from year to year. That is we could have a 1% tax increase entirely born by the worker and another 1% of phased in benefit cuts. Presto the 75 year actuarial gap is more than backfilled plus about 62% of the PV of Infinite Future liabilities. (2%/3.2%).

Sensible, cheap, easy but unlikely to make it onto the policy table. Because people like Jack Kemp and President Bush are bringing non-negotiable components to the policy table. My personal opinion is that private accounts are a deal breaker for both sides.