TAXING RETIREMENT

The president suggested a reasonable sounding way to fix Social Security Thursday night – cut benefits to the wealthy while ensuring that low-income workers get more. The problem is that this deceptively simple sounding solution could actually harm middle-income earners. Worse, the whole problem could be more easily solved if the president didn’t insist on massive tax cuts for the wealthy.

Shortly after the president addressed the nation and called for cuts in Social Security benefits to save a program he says would be bankrupt by 2041, Congress narrowly passed a budget plan that included $106 billion in new tax cuts. Those tax cuts will further increase the federal deficit, putting more pressure on government to cut programs and find money to pay for others.

The tax cuts passed Thursday night include $70 billion in cuts that are fast-tracked, requiring only 51 votes for approval. The tax cuts are likely to include a two-year extension of lower capital gains and dividend tax rates. According to Urban Institute-Brookings Institution Tax Policy Center analysis, 53 percent of the benefit of these cuts this year will go to households with incomes exceeding $1 million, or 0.2 percent of American households.

Based on Congressional Budget Office estimates, the 2001 and 2003 tax cuts, if made permanent, will cost more than $11 trillion over the next 75 years, or triple the size of the Social Security shortfall. The budget resolution also includes $35 billion in entitlement cuts, with $10 billion expected to come from the Medicaid program. A large cut in the food stamp program is also expected.

The president’s latest Social Security fix, called progressive price indexing, sounds good at first. Who would not be in favor of smaller benefits for those who don’t need them to preserve more generous benefits for those who do? In fact, this would close nearly three-quarters of the Social Security shortfall in 75 years. However, while the highest earners would see the biggest benefit cuts, middle-income workers could see large cuts as well. A person earning $36,000 today who retires in 2055 could see a 21 percent reduction in Social Security benefits.

Worse, this approach weakens the broad support that Social Security now has, making the program vulnerable to more radical changes in the future.

The president also stubbornly stuck to his push for private accounts, a proposal under which workers could invest a small portion of their payroll taxes in the stock market or other securities. This plan would require as much as $3 trillion in borrowing, do nothing to stem the shortfall and is losing support among Republicans in Congress. It is also unhelpful that he refuses to consider increases in the payroll-tax rate to bring more revenue into the system.

Sen. Olympia Snowe, who serves on the Finance Committee and whose vote is critical to the success of any proposed changes, has the right standard for considering each proposal: whether they will maintain Social Security as the successful retirement poverty abatement system it has been for decades. If suggested changes don’t meet this standard, she should oppose them.

So far, nothing the president has proposed has met that standard.