White House Memo Implies Tax Hike

On January 3, an internal White House memo on Social Security privatization made the rounds in Washington. It outlines in rough sketches, the president's plan to privatize Social Security. Two things are clear about this plan: First, it will mean higher taxes in the future; and second, workers will receive worse benefits and face a greater gamble with their retirement savings in return.

The memo reiterates President Bush's opposition to Social Security tax hikes. In the past, President Bush has clarified that this includes his opposition to a higher tax rate as well as to, for example, raising the cap above which wages and salaries are not subject to Social Security taxation, currently $90,000. President Bush is unwilling to raise revenues for Social Security, although this could be done progressively, e.g. by raising the cap, which has the added benefit of finding bipartisan support.

Instead, the White House memo makes it clear that President Bush favors cutting benefits and going deeper into debt. His handpicked Commission to Strengthen Social Security, consisting only of privatization proponents, already presented the blue print of this proposal in its second option out of three. Benefits would be reduced by increasing benefits of new retirees not by the growth rate of average wages, but by the inflation rate. In other words, the benefits that new retirees would receive would be frozen at today's living standard. Had this been in place since the inception of Social Security, people today would retire with a Social Security benefit that reflected the living standard of people in the 1930s, when 40 percent of households did not have indoor plumbing.

Reflecting the thinking of the CSSS, the White House memo also reiterates the need to borrow more money. The rationale for new deficits has nothing to do with the way Social Security operates. Rather, it is solely the result of establishing individual accounts. The money that otherwise would have paid for Social Security benefits would then go to individual accounts. To continue paying benefits promised to those already retired or nearing retirement, Social Security will need more money.

Additional money can come from either cutting overall federal spending, raising taxes or borrowing more. There is little room to cut spending as it is, especially since spending cuts are part of the Bush administration's way to pay for its massive tax cuts. Also, after four years of large tax cuts, President Bush is unlikely to reverse himself just to pay for Social Security privatization. This just leaves open the option of more debt in the short-run.

However, if the government borrows more money now to pay for Social Security privatization, it needs to cut spending or raise taxes in the future to pay for it.

Under the plan laid out in the White House memo, benefits would be reduced, relative to today's levels, every single year into infinity. According to the Social Security actuaries, this would translate into an 18 percent reduction relative to what is currently promised for retirees retiring in 2032 and to a 46 percent cut for people retiring in 2075. This leaves little room for more cuts.

What about other spending? Again, there is little room to cut because the Bush administration is already counting on spending cuts to finance part of the deficits created by massive tax cuts.

If there is no room to cut spending, future governments will have to raise taxes. The amount necessary to be raised in taxes would equal about two thirds of the expected shortfall for Social Security under the CSSS' second option. Hence, President Bush is perfectly fine with increasing taxes to pay for privatization, but he opposes higher taxes for Social Security. Of course, he also prefers to see these tax hikes occur when he is no longer in office.

This could make sense if people ended up better off with a privatized system than they would with Social Security the way it is now. However, according to a study by the non-partisan Congressional Budget Office, people could expect higher benefits from Social Security with no changes to the system than from a privatized system.

President Bush's Social Security privatization plan will inevitably entail benefit cuts and more debt, which means more taxes in the future. That is, under President Bush's plan, people will end up with fewer benefits, pay more taxes, and face a greater gamble with their retirement savings than they would under Social Security. Thus, this is clearly not about who has the better economic argument to save Social Security, but about pushing a radical ideological agenda.

Christian E. Weller is a senior economist at the Center for American Progress.