Taxing Social Security Isn't Enough

TRB

February 11, 1993|By TRB

WASHINGTON — Washington. -- On January 31 the New York Times reported that President Clinton and his advisers were considering eliminating Social Security's cost-of-living increase for one year -- an $8 billion cut from a $374 billion program. That morning Senator Daniel Moynihan, Democratic chair of the Finance Committee, went on ''This Week with David Brinkley'' to offer these words of support for the new president:

''[T]hat's a real blow. You wonder how many more millions of people you want in poverty, doing something like that. . . . It's a death wish, and let's get it out of the way and forget it right now.''

Who needs gridlock, when you have Senator Moynihan? Oddly, though, Mr. Moynihan wasn't condemned in the editorial pages as an undisciplined tool of the elderly lobby. The reason is that he left the door open for an alternative anti-deficit measure: subjecting a greater share of Social Security benefits to income taxation.

Benefit-taxation is considered a superior reform because, unlike an across-the-board cost-of-living freeze, it affects mainly affluent retirees. (The elderly poor pay little or no income tax.) ''We should all be grateful to Senator Daniel Patrick Moynihan,'' wrote Robert M. Ball, a former Social Security commissioner and influential Democratic adviser who favors benefit-taxation.

One wonders just how grateful Mr. Clinton should be, though. Couldn't Moynihan have let the balloon float for at least few seconds before going on television to puncture it? Maybe the phone lines wouldn't have lighted up with angry voters. We'll never know now.

Worse were the arguments Mr. Moynihan used. ''Social Security is in surplus,'' he declared, agreeing with those who say ''it is not the problem.'' The cost-of-living cut is now dead, but this argument lingers on to stymie any attempted reform. If Social Security ''isn't the problem,'' why should benefits be taxed?

But the most troubling aspect of the victorious Moynihan position is substantive: Benefit taxation is not an adequate solution for the problem at hand. It is, for one thing, unlikely to raise much money.

The reason is that half the benefits of well-off recipients -- single retirees with over $25,000 in income, and couples with more than $32,000 -- are already taxed as a result of the 1983 reforms that saved Social Security from bankruptcy. The suggestion now is that the taxed portion be raised from 50 percent to 85 percent. But if the extra taxability applies just to the fifth of recipients who fall above the $25,000-$32,000 threshold, it only raises about $8 billion in 1997. Mr. Clinton wants to cut the 1997 deficit by $145 billion. Should he enrage seniors for a mere $8 billion?

The only way benefit taxation can produce a large amount of money is if President Clinton gets rid of the income ''thresholds'' -- that is, if he taxes 85 percent of everybody's benefits. The elderly poor still wouldn't pay anything (their incomes would remain too low to tax). But most retirees would pay a bit. That would bring in $27 billion a year by 1997. Now we're talking real money.

Unfortunately, the Democrats will never impose a no-threshold tax. Since they have already zapped the richest fifth of retirees, it would look ''regressive,'' if not downright mean, to go back and hit the middle three-fifths. Democrats are trapped by their ''progressivity'' fetish.

Even if Mr. Clinton could raise the whole $27 billion, it arguably would not be enough. There is more than one reason, after all, why we might want to reduce Social Security benefits. Fully taxing benefits might do the job if all we were interested in was balancing the federal budget. But even if the budget were balanced, and Social Security adequately funded (which it's not), we could still decide that Social Security was simply eating up too much of our gross national product.

What is the best use for $374 billion? Is it a pension system that, even if benefits are taxed, will still send generous checks to rich retirees? Would we rather spend $50 billion to solve our urban underclass problem, or continue to give the money to elderly Americans who don't need it?

These considerations point to a more radical approach than benefits taxation, namely ''means-testing'' -- not taxing, but actually cutting the benefits that now go to the affluent (those with enough ''means''). Ross Perot suggested a means test before being badgered by the press into abandoning the idea. A vigorous means test could easily redirect $60 billion a year away from Social Security to other uses, without touching most retirees' benefits.

The main argument against means testing is that it would destroy political support for Social Security. The upper middle class, Senator Moynihan and others suggest, will ask, ''What's in it for me?,'' and kill the system.

But these fears are almost certainly overblown. Australia runs a means-tested Social Security plan in which the richest quarter of retirees get no benefits at all. That's one reason their system cost 5.49 percent of national earnings in 1981, compared with about 9 percent for ours. Yet their upper middle class hasn't revolted.

How do the Australians do it? Maybe their secret is they don't have Senator Moynihan.

TRB is a column of The New Republic, written by Mickey Kaus.

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