February 16, 2004
I certainly applaud the President on his purpose and his optimism in his State of the Union message.
But I wanted to scream at the end of his outline of
domestic programs that our country does not have the resources to do what he
wants. Keeping the
discretionary budget growing less than the rate of inflation is not going to
halve the deficit by the end of his administration.
Once you subtract out all the mandated programs, such
as Medicare and Medicaid, and pay the growing interest on the mounting debt,
that discretionary budget is less than 20 percent of the total budget.
Perhaps he believes that tort reform will slow those
medical costs to less than three percentage points more than the rate of
inflation. Maybe he hopes that
energy programs will improve the balance of payments and reduce our mounting
debt to the rest of the world.
Yet, one year after outlining the goal of halving the
deficit by 2009, the Congressional Budget Office has determined that this
year’s budget deficit probably will be a record. Furthermore, the CBO, using current law, estimates that
deficits will average $388 billion in the next four years.
Current law sunsets some of the tax reductions that
President Bush wishes to make permanent.
Neither does it adjust for “tax reform,” which increasingly
appears to be little more than reducing the impact of the alternative
minimum tax (AMT).
Those changes alone add about $170 billion per year to
the deficits. (Those who say
that the revenue growth achieved by these changes would raise the tax base
sufficiently to pay for them simply do not understand economic behavior.
Preserving tax cuts may prevent growth from declining, while the AMT
actually has a lower marginal tax rate than the basic tax code for many
people. They do not stimulate more revenue than currently exists).
These changes alone probably make the deficit goal
unachievable. But President
Bush then wants to allow young people to take up to 4% of their social
security contributions to fund private retirement accounts.
Furthermore, these new accounts will be financed
without raising payroll taxes or altering the benefits that those 55 and
older currently expect.
As the President clearly stated, the outgo begins to
exceed the income for social security in 2018.
By further lowering the income but doing virtually nothing to change
the outgo by that time, the cash flow turns negative even sooner.
Some of the proposed changes in social security he
ascribed to others, such as changing the retirement age or using prices
rather than wages to index the initial benefits paid might have some impact
by 2042. But they will
not prevent the drastic changes in benefits or taxes that he currently
indicates will be required to prevent the system from going bankrupt.
In fact, the system does not go bankrupt.
It merely becomes a bad deal for young people.
In 2042, or sooner with private retirement accounts, the bookkeeping
surplus in social security vanishes. About 75 percent of the promised benefits still can be
delivered through prevailing cash flow.
That certainly is a busted system, but not a bankrupt one.
I remember those cartoons when President Nixon attacked
the energy crisis by changing daylight savings time. They showed a blanket that had been cut at one end and sewed
back on the other. The
implication: you did something but you did not change anything.
If we use debt today to fund those private savings accounts, are we really securing retirement for the next generation? They may get a better return on their personal retirement accounts, but they will be paying much larger interest in their government budgets. Furthermore, the government debt would be trillions higher than if we did nothing.
A few months ago I wrote that we should fund the
actuarial deficit that currently exists in the social security system by
imposing payroll taxes on all wage income (rather than the estimated $90,000
individual ceiling in 2005). We
should then manage the system responsibly with a surplus pool rather than
rely upon the Treasury to assign interest income based upon yields on
Anyone choosing to drop out of the system by
establishing personal retirement accounts for the full 6.2 percent paid by
individuals should be permitted to do so.
No one liked my proposal. But it was achievable. Halving the deficit and accomplishing the list of domestic programs outlined by President Bush is not.