Grasping the Third Rail

Grasping the Third Rail

I had heard that Obama was talking about fixing Social Security, and my first reaction was, "That will take some serious courage, and be the end of his hopes for getting anything done." Bush decided to "spend some political capital" on this after the 2004 election--and went down in flames. The harsh reality is that Social Security is the third rail of American politics; like the third, electrified rail of a New York City subway, touch it, and you die.

I understand why. There are a lot of Americans who are utterly dependent on Social Security, or at least heavily dependent on it. They are too old to go back to work full-time, and many are too old to go back to work part-time. (Heck, I'm only 52 and I'm already at an age where most employers won't seriously consider me.) Those who are now retired spent their working careers assuming that Social Security checks would be there, and planned their careers around that--and I can see why they regard this as a sacred trust, especially because many of the alternatives that are now available, such as 401(k) and IRA accounts, simply did not exist for many of these retirees when they were working.

But the ugly truth is that Social Security was always a Ponzi scheme--and FDR created it because an even more irresponsible proposal, the Townshend Plan, was enjoying widespread popularity at the time. Something is going to have to give. At least one of the following has to happen: Social Security taxes go up; benefits get scaled back; retirement age increases; at least part of the system is privatized so that the money is invested in the stock market; or we have enough children to keep the Ponzi scheme going. (Even if you don't have a moral problem with abortion, economics alone is a strong argument against it.)

Anyway, this column in the January 11, 2009 San Francisco Chronicle points out that Obama lacks Bush's courage:

Of all the points Obama addressed during a meeting last January with our editorial board, the one that gave him pause was his answer to a question about what he might do to address the coming crises in Social Security and Medicare.

Obama had suggested that a Social Security tax increase might be needed to offset the imbalance between revenue and benefits. He came back to make it clear that he was talking about possibly raising the ceiling on income that is subject to the Social Security tax (now $106,800) and not the tax rate (now 6.2 percent per worker, with an employer match).

Obama was blunt. He did not want any misunderstanding leading to a news story that would have him advocating an increase in the tax rate - which would lead to a TV commercial. "And it wouldn't be from us," he said.

Such is the sensitivity associated with talking about reforming the giant entitlement programs. Obama deserves credit for volunteering one of the tough-but-necessary reforms in the heat of his primary battle with Sen. Hillary Rodham Clinton. At a news conference last week, Obama pledged to make Social Security and Medicare reform "a central part" of his administration's strategy to constrain federal spending. He did not offer details.

Raising the ceiling on Social Security taxes probably makes sense, especially because Social Security benefits are not means-tested. If you make $250,000 a year, and retire within a few years of making a high income, you will get a very, very healthy Social Security check when you retire. Yes, if you make more than $34,000 a year (joint income), 85% of your Social Security check is taxable. But still, that means that a retired couple bringing in $50,000 a year in pensions, interest, and Social Security checks, is taxed at a lower rate than a working couple making $50,000 a year.

Raising the ceiling makes sense. People making millions of dollars a year (Hollywood Democrats, for example) can afford it--and people who are making $20,000 a year can't afford any increase in the Social Security tax rate. Social Security is among the most regressive of taxes. People at the very bottom (the ones that Democrats claim to care about) often pay only Social Security taxes--and they get hit very hard by this.

But raising the ceiling isn't going to solve the core actuarial problem of Social Security. It's not terribly courageous or effective. Obama better have something a bit more serious in terms of reform in mind. And he better have some rubber insulated and asbestos gloves when approaching the third rail.