The Problem With the 28% Solution

The Claremont Institute said Mickey Kaus has said something about Social Security that no one else has: If liberals were serious about their domestic agenda, they would scale back future Social Security benefits more that Pres. Bush has proposed – a lot more. Such reductions would transfer resources from Social Security, “a universal check-writing scheme,” freeing up those percentage points of the Gross Domestic Product for a government program of universal health care, the last big piece of the New Deal – Great Society puzzle. “Would you take a deal that gave us universal Medicare-style health insurance if the price was cutting down Social Security into a mere program of earned insurance against poverty? It seems like a no-brainer to me.”

That is why GWB focused on Social Security before looking at Medicare.

Asking liberals to think in terms of trade-offs, however, or to acknowledge the self-evident truth that there can never be more than 100 GDP percentage points available to any welfare state, is asking a lot. Matt Miller explained why in a recent column in Fortune. Despite the vehemence of the debate between liberals and conservatives over the size of government, the outer limits of what’s politically feasible are not very far apart. Miller points out that all taxes to the federal government now amount to “16.3 % of GDP, historical lows not seen since the 1950s.” They reached their peak during Bill Clinton’s second term at nearly 21% of GDP.

As everyone understands, Social Security has made promises it can’t keep. Either its benefits will be reduced, its taxes will be increased, or it will derive revenue from sources outside its own payroll taxes. Generally speaking, conservative approaches emphasize benefit cuts and liberal ones emphasize tax increases.

There’s now a good deal of liberal rhetoric about how Social Security is basically in good shape, and needs just a few minor adjustments.

I suspect they will regret that rhetoric, when it comes back at them.

However, the most prominent liberal reform plan, developed by Peter Diamond and Peter Orszag of the Brookings Institute, envisions, according to Kaus, “the current 12.4 percent Social Security payroll tax rising to 15.4 percent in 2078 and continuing to rise ‘slowly over time thereafter.’” And the payroll tax goes “only” that high because, according to the back of the envelope where Kaus made his calculations, Diamond and Orszag impose benefit cuts equivalent to roughly another 1 percent of payroll taxes. Even then, “if the Medicare tax is kept at its current 2.9 percent (a seeming impossibility) that means total FICA payroll taxes in excess of 18%.” The two programs liberals defend most fiercely could easily require payroll taxes over 20%, more than half-again as high as their current level.

Of course, liberals will hardly be satisfied to spend the 21st century maintaining two huge social insurance programs for the aged, one created in 1935 and the other in 1965. There’s one other big thing they want to do – universal health insurance – and lots and lots of not-so-little things beyond that. Some Democrats have pointed out that we could make Social Security solvent by repealing all the tax cuts signed by Pres. Bush in 2001. Miller’s no fan of those tax cuts, but says, “You can repeal them only once.” If their repeal fixes Social Security then it can’t be used to fix Medicare and Medicaid (“scheduled to double from 4.5% of GDP today to 9% by 2030”). And it certainly won’t be available for “the plethora of other Democratic priorities, from covering the uninsured, to wage and child-care subsidies for the working poor, to R&D and infrastructure backlogs.”

So, Miller asks, what is the Democrats’ “secret number”? “How do we propose to make the health and pension programs for seniors sustainable while also paying for needed nonelderly initiatives? And how do we do all that while keeping overall taxes as a share of GDP at levels that don’t hurt economic growth ([and] without pushing taxes beyond levels Americans are likely to support)?” Miller asked around and got this marvelous non-answer from one of Pres. Clinton’s economic advisors: “I don’t think that conversation has yet taken place in the heads of most Democratic economists.” A secret is something that somebody knows. The Democrats’ secret number, however, is a secret even to themselves, because it’s an answer to a question they are determined never to ask – how big a share of the national income should be devoted to the liberal agenda?

Miller did some calculations on the back of his own envelope: the cost of the “full progressive monty” comes in “somewhere around 28% of GDP” – requiring federal tax levels three-quarters again as high as they are now, and one-third again as high as they were during their historic peak under Bill Clinton. His first reaction? “Yikes.” And his second? “If Democrats are forced to consider their secret number explicitly, they may discover we shouldn’t, or can’t, go that high. . . . Seen through this prism, Democrats might then be open to spending-side changes in Social Security that they rule out today because they’re thinking too narrowly.” This narrow thinking, however, is an essential attribute of liberalism, not some accidental feature that wider horizons will cure. Precisely because making their secret number explicit might lead to the discovery we can’t or shouldn’t go that high, Democrats will resist every effort to force them to consider it.

Kaus makes a sensible argument about Social Security: “Universality is extremely expensive.” Devoting such a large portion of our GDP to mailing “Social Security checks to rich and poor alike” can’t possibly be “the highest and best use” of it. But it is certain to be unavailing. Considering their secret number explicitly is both the lastest of resorts for liberals and, as Miller says, a requirement before they might even think about reducing Social Security benefits.

Better, in other words, to send generous Social Security checks to every millionaire in America than to yield any of the GDP percentage points liberals have spent decades wresting away from the private sector for the expansion of the public sector. Kaus is willing to gamble that letting Social Security lurch to the edge of a crisis might, finally, get liberals serious about means-testing the program so that those GDP points could be used for other, more urgent needs. But the liberals who will ignore him are certain to gamble that a crisis in Social Security will be a lever to move more of those GDP points into the public sector – and to do it without having to think about or say their secret number.

TheAnchoress blogged I’m still thinking and learning about Social Security and I think this is a pretty good article on the whole issue of reform.

Ramesh Ponnuru blogged William Voegeli analyzes recent columns by Mickey Kaus and Matthew Miller.

If the Dems ever get over their Hate Fest and learn to compromise instead of always saying No, this column will be a good one to look back on.