Kemp Fumbles Social Security Reform

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Kemp Fumbles Social Security Reform

by Ari Armstrong, December 8, 2004

Jack Kemp, who rolled through Denver last month, may have been a "most valuable" quarterback in the NFL, but his handling of Social Security should earn him a spot on the conservatives' bench.

In a December 6 column, Kemp complains about those who assert "that any reform of Social Security involving the creation of personal retirement accounts must be accompanied by benefit cuts, tax increases and/or hikes in the retirement age." Such people, Kemp believes, "are draining personal accounts of their vitality, jeopardizing Social Security reform and ultimately endangering the Republican congressional majority." Kemp particularly picks on Senator Lindsey Graham, R-S.C., who wants to impose the Social Security tax on higher incomes.

But Kemp's true enemy is not an obstinate Republican, but rather the hard logic of mathematics. It's really quite simple. Mandatory, regulated accounts would apply only to workers some distance away from retirement. Thus, in the short term, converting part of the Social Security tax to mandated accounts would mean a loss of revenues for current retirees. Where does Kemp think the money is going to come from to cover this loss? He's throwing a Hail Marry in an empty field and wondering why nobody can catch the ball.

A Los Angeles Times story by Warren Vieth and Janet Hook reprinted in the December 7 Denver Post claims, "Independent analysts have estimated the government initially would need to borrow more than $1 trillion." While unnamed and allegedly "independent analysis" are unconvincing, the article also quotes White House Spokesperson Scott McClellan: "There will be some up-front transition financing that will be needed to move toward a better system."

So what is Kemp's proposal? "The answer is to refinance our unfunded liability, just as any corporation in the same situation would do, and shore up the system by allowing workers to pre-fund their own retirement through personal accounts they own and control." The only thing this can possibly mean is paying the transition costs by borrowing the money. But increasing the national debt is nothing but a time-delayed tax increase. If national spending increases, it makes very little difference whether the additional spending is covered through immediate tax increases or through deficit spending (future tax increases).

Robert Novak's column popped in the Post the same day as the story from California. Novak, who is not fooled by financial sleights of hand, writes, "Graham's bill and accompanying statement did not address the elephant in the living room that Republicans ignore: an estimated $1 trillion in transition costs. He did address it, however, in his Heritage speech."

The upshot is that Social Security reform may combine the worst elements of both sides: the higher taxes of the Democrats plus the mandatory accounts of the Republicans. Which means less economic liberty for Americans.

The fundamental problem with Kemp's remarks is that they assume mandatory, regulated accounts are a good thing. They are not. They are a major violation of free markets. Furthermore, mandated accounts are simply irrelevant to real Social Security reform. Whatever the specifics of the plan, any proposal to replace part or all of Social Security with mandated accounts could work as well without the accounts. Except that approach would encourage too much honesty with the American people. Mandatory, regulated accounts are the conservative equivalent of Oz's curtain.

Social Security should be phased out. If the welfare statists cannot be overcome politically, a compromise that moves in the direction of liberty is to replace Social Security with a means-tested program that helps only the poor. (An existing welfare program could be expanded to cover the elderly poor or the Social Security tax could be reduced and distributed only to the poor.)

A major advantage of the phase-out plan is that it incurs no transition cost. Instead, it steadily reduces total benefits paid along with the rate of the Social Security tax. The reduction in taxes always follows the reduction in spending. Thus there is no danger that taxes will be increased and then later redirected to some other purpose.

Kemp's protestations notwithstanding, the only way to fund Bush's plan for mandatory, regulated accounts is to raise taxes, cut benefits, or borrow money. None of those options is desirable. The problem lies not with the promoters of the plan but with the plan itself. Mandatory, regulated accounts are fundamentally wrong, and any true conservative will reject them.


For additional analysis, please see Social Security: Collected links.

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