Friday, March 04, 2005

Saving President Bush's Social Security Proposal

President Bush today was at my alma mater, Notre Dame, trying to win support for his Social Security plan, which appears to be in serious trouble with top Republicans such as Senate Majority Leader Bill Frist, wanting to put off a vote on the President's plan until 2006. One of the significant difficulties President Bush's plan has is that it would potentially cost trillions of dollars in transition costs to partly privatize Social Security. I would love to have the opportunity to invest part of my Social Security taxes in a private account, but I worry that the short-term transition costs are going to run government deficits so high that it puts a downward pressure on the dollar and causes a recession. This is an issue that President Bush has to deal with, especially when Social Security is not going to start losing money for at least 10 to 15 years and he is not going to be able to sell this as a "crisis".

So how does President Bush pay the trillions of dollars in transition costs for Social Security without running the economy into a recession? Answer: Raise the cap at which Social Security taxes is collected. This idea has been floated around by President Bush as an alternative to his privatization plan, but it has caused great wailing amongst several conservatives such as Larry Kudlow, who believe that raising the cap would hurt job growth. It's true that raising the cap with the current Social Security tax system would increase the cost of labor for an employer since the employer matches their employee's Social Security tax contribution.

However, with a little creativity, that problem can be eliminated and the cap can be raised without wrinkling the feathers of too many Republicans. To prevent the problem of raising the cost of labor, employer's contribution would be $0 after $90,000. Then in raising the cap, the cap should be set at $200,000 (this number could be potentially higher or lower depending on how the math works out), with any income between $90,000 and $200,000 being taxed at the rate of 5% for Social Security with anything above $200,000 not being taxed for Social Security. This rate would lower than the current rate of 6.2% employees contribute to Social Security for the first $90,000. In addition, there would be a sunset provision for this tax to expire in ten to fifteen years in order to win the support of jittery Republicans worried about passing a tax increase. The increase in the cap would bring in the sufficient funds to pay for the transition costs of privatizing Social Security. In addition, the cap increase should have the support of most Americans, especially when considering that most Americans make less than $90,000 and have all their income subjected to the Social Security tax, not just a part of it.

Once President Bush has a way to pay for the transition costs of Social Security, the other current problems with his proposal become more manageable. The plan will seem less risky, making it easier to sell Americans on the plan and significantly undercut one of the Democrats talking points on the issue. There might be other ways to pay for the transition costs, but it is an issue that President Bush must figure out quickly if his plan is to have a prayer of passing.