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Wexler's proposal exposes Democrats' Social Security problem

Ross Kaminsky - 5/20/2005

Despite the constant reminders that President Bush's Social Security reform plans are not polling well, the Democrats realize that their do-nothing position is untenable in the long run. Americans know there is a problem with the system; Tom Daschle can attest to how poorly obstructionism works as a political strategy.

It is in that context that Florida Democrat Robert Wexler has introduced the first Democratic proposal for Social Security reform in many months, despite being urged by Nancy Pelosi to toe the line and keep quiet.

It may be a winning political move for Wexler in his home district - until his constituents learn the full ramifications of the plan. For the Democrats overall, Wexler's plan is an important first crack in their wall of silence and puts them in a no-win situation.

The Democrats have pursued "the silent treatment" vainly hoping to force President Bush to give up on personal accounts in the interest of "getting something done." Bush won't play that game, and he deserves credit for sticking with his "ownership society" principles, (particularly given his tendency to abandon them on other issues such as free trade.)

The major problem for the Democrats now is that Wexler has demonstrated why the Party has had no choice but to keep quiet: their only proposal to fix Social Security is to raise taxes and they know that outside Manhattan, San Francisco, and other bastions of liberal strength, tax hikes are not politically popular.

The Wexler tax increase would be the largest in American history, taking an estimated $731 billion from almost 10 million workers in the first ten years. It also disproportionately penalizes older workers, raising taxes on about 3.5 million workers who are within 10 years of retirement and likely at their earnings peak - in other words when their retirement savings potential is near its greatest if the government keeps its hands off their wages.

Wexler thus wants to increase taxes on older workers and hand the money back as a Social Security benefit a few years later, providing an effective return to workers much worse than they would receive in conservatively invested personal accounts or even in bank CDs. In fact, one study notes that in Wexler's congressional district the average return on Social Security payroll taxes is 0.75% for a married Caucasian man and -1.13% (yes, that's a negative number) for a single African-American man.

Once Americans understand this dynamic, it can only increase the popularity of President Bush's plan by comparison. Given the relatively older demographic in Florida it is an especially bad idea for Wexler's own state. The AARP should be concerned about the damage Wexler's plan does to those closest to joining its membership.

Macroeconomically, the Center for Data Analysis at the Heritage Foundation estimates that this tax cut will cost the economy an average of 340,000 jobs and $33 billion of GDP annually for at least ten years.

Yet even a tax increase this large delays the onset of Social Security deficits by just a few years; it does not come close to fixing the solvency problem. The only honest way to avoid Social Security bankruptcy without hamstringing the economy is through a combination of benefit cuts and personal accounts. But politically the Democrats can not acknowledge that fact.

They are forced into their position opposing personal accounts at all costs because of their extreme (and rational) fear of such accounts moving traditional Democrats such as low income workers and union members into the ranks of the "investor class". Republicans and Democrats alike are keenly aware that investors vote for Republicans over Democrats by a 15 percent margin.

As a general matter, Democrats have a great deal of political power to lose by allowing large numbers of people to reduce their dependence on government. Personal accounts in Social Security are the largest potential change in that direction since the introduction of the income tax began our redistributive economic policies. Since benefit cuts are almost as abhorrent to Democrats as personal accounts (for the same basic reason) they are left with no possible suggestions beyond massive tax hikes.

Representative Wexler has demonstrated this with great clarity, for which pro-reform citizens should be thankful but not surprised. Personal accounts only poll badly because the Democrats have not, until now, given a counter-proposal. Although unsustainable, "the silent treatment" had been working. No wonder Nancy Pelosi wanted Wexler to keep quiet.