The Commission, Part I

As alert readers will know by now, President Obama has appointed a commission on the federal debt, mainly focused on Social Security, Medicare and Medicaid. To signal his seriousness about this venture, the President has gone so far as to put the newly passed health reform bill on the negotiating table — even though the ink on the new law is barely dry.

Just to get everyone’s thinking jump-started, let me propose four bold ideas:

  • A regressive increase in taxes.
  • A regressive cut in benefits.
  • A tax on capital income, destined to remove from the economy the funds needed to create jobs and make workers more productive.
  • No change in the Ponzi-scheme structure of these programs — by which we continue to promise benefits we are not willing to pay for.

If these ideas do not immediately strike you as appealing, you need to know they are not really my ideas. The bullet points above describe the results of the 1983 Greenspan Commission — a bipartisan effort to “save” Social Security. At least inside Washington, D.C., and in the mainstream media, this effort is universally regarded as a stellar example of how politicians should solve problems. Many hope the commission on the federal debt will follow the Greenspan commission example.

More compassionate people, like yours truly, hope they do not succeed.

Behind the Green Door


Let’s briefly review what official Washington considers real reform. Because of the Greenspan Commission recommendations:

  • The payroll tax was raised by 1.6 percentage points. But since this tax reaches wage income only and since it is capped, it is overall one of our most regressive taxes.
  • An increase in the normal retirement age is now being phased in — from 65 to 67. This change is not prompting people to delay retirement, however. Instead, more than 80% of retirees who claim early retirement (before age 65) are getting lower than otherwise monthly benefits. And since the lower your income, the more likely you are to retire early, this reduction in benefits is also regressive.
  • As we have explained before, the tax on Social Security benefits is not really a tax on benefits at all. Instead, it is a tax on other income — mainly capital income, including pension payments, IRA withdrawals, dividends, capital gains, etc. And as also explained before, taxing capital shrinks the capital stock which, in turn, lowers productivity which lowers wages, which lowers family incomes.
  • No effort was made to convert from a pay-as-you-go (chain letter) system of finance to a funded system in which each generation pays its own way. Thus, the United States avoided the kind of real reform that more than 30 other countries have embarked on.

Here’s the bottom line: Efforts to patch up federal Ponzi schemes are not real reform. Their only purpose is to help a structurally flawed systems limp along — to put off the inevitable day of reckoning. In the meantime, the patchwork changes are almost always regressive — imposing the bulk of the cost on those least able to bear it.

Comments (13)

Trackback URL | Comments RSS Feed

  1. Ken says:

    Good post. I fear nothing good will come of this commission.

  2. Vicki says:

    Is the Green Door supposed to be the Greenspan Door?

  3. Larry C. says:

    You are absolutely right, John. This commission has no other purpose other than to patch up the Ponzi scheme.

  4. Devon Herrick says:

    The President did not need to appoint a commission to recommend ways to avoid bankrupting future generations. He could merely have refuse to sign the health reform bills and told Congress to go back to the drawing board and designed a reform plan that would not cost $1 trillion during the first decade alone. It is very disingenuous to pretend rising debts associated primarily with old age and health care entitlements are a serious threat all the while backing and signing bills into law that only make the problem worse.

  5. Joe S. says:

    Agree with all of the above. This commission is going to be a disaster.

  6. Blakle Woodard says:

    I would simply eliminate Social Security and replace it with a welfare plan for indigent seniors. However, since that probably is not politically feasible, here is my solution. As you read it, keep in mind that I am 45 years old.

    Step 1: No change in Social Security benefits for anyone currently age 55+.
    Step 2: Anyone ages 50 to 54 would have a retirement age of 68.
    Step 3: Anyone under age 50 would have no Social Security at all (this includes me).
    Step 4: No change in taxes. All, including those under 50 (this includes me) would continue to pay Social Security taxes at the current levels with the current indexing of the maximum taxable wage.

    With this plan, those of us under 50 would sacrifice by paying taxes in exchange for receiving nothing. We would do this to effect an orderly wind-down of the mess that our parents’ generation created so that our children and grandchilren might live in a solvent country.

  7. David R. Henderson says:

    You’re mistaken about who was responsible for the retirement age increase. In my opinion, that was one of only two good things implemented in the law. But Greenspan’s commission didn’t propose it. It was an heroic Texas Democratic Congressman, Jake Pickle, who held out for it and got it in the law.

  8. Virginia says:

    I agree with Blake. But I don’t think it’s politically feasible. The government wants seniors to depend on their monthly checks.

  9. John Goodman says:

    David, thanks for the correction.

  10. Dave Moyer says:

    I have been promoting something similar to Blakle for some time, although I’d probably put that limit of who would get no SS to those under 40. Maybe those between 40 and 45 would get half the current amount. People need significant time to invest enough to retire on. One challenge to that scheme for which I have no solution is how to prevent people from becoming indigent on purpose by transferring wealth to younger relatives. I really don’t see another way to make SS work, though. We just need to educate the public that it is a Ponzi scheme and keep repeating “THERE IS NO TRUST FUND”.

  11. Al Peden says:

    The most immediate problem is the Medicare Part A trust fund, which will have fallen to zero in seven or eight years. I expect the commission will raise the eligibility age for Medicare to 67 (the new Social Security age for full benefits). Unfortunately, that’s only a start.

  12. Don Levit says:

    Too much focusing on when the trust funds fall to zero misses the bigger picture.
    From a paper entitled “Prefunding Social Security Benefits to Achieve Intergenerational Fairness,” written by Randall Mariger, a staff economist at the Treasury department.
    Page 12 – “The optimal non Social Security policy can be implemented simply by ignoring Social Security surpluses and treating the trust fund balance as a liability to the non-Social Security budget no different than debt held by the public.”
    Page 20 – “It implies that increasing payroll tax revenues so as to postpone the negative cash flow date would improve long-term federal finances. But assuming Social Security surpluses are not saved, this is wrong. The additional revenues only make it possible for non-Social Security policy to be irresponsible for longer.”
    Don Levit

  13. Bart Ingles says:

    Step one should be to freeze Social Security so-called cost of living increases, or at least cap them at inflation minus one percent.

    In addition, if benefits are to be held constant during years of deflation resulting in an increase in real-money benefits, then whenever inflation resumes COLAs should continue at zero until the deflationary windfall is erased.

    Two additional points about restricting benefit increases:

    (1) This could be viewed as a first step toward a transition toward a defined contribution regime. It would make sense to set aside some of the more radical/less politically viable retirement account proposals until this first step is accomplished.

    (2) The debate to increase taxes versus reduce benefits is not symmetrical where fairness is concerned. The shortfall exists because tax rates in the past weren’t high enough to finance planned benefits. Raising future payroll taxes would increase this unfair transfer of wealth from future workers to past retirees; reducing near-future benefit increases would reduce the transfer (although it wouldn’t achieve parity).