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.