March 1, 2001

March 1, 2001 | Commentary on Taxes

Tax Cuts Won't Harm Social Security

Foes of President Bush's tax-cut plan are getting desperate. They haven't reached the point of claiming that tax cuts cause cancer and road rage, but they're close. Depending on the day of the week, we're told that cuts will cause inflation, encourage deficits, help only the rich, or hurt the economy.

One of the more imaginative claims is that tax cuts somehow will prevent lawmakers from saving Social Security. President Bush's 10-year, $1.6 trillion tax cut, we are told, will soak up the surplus and leave no money to reform the government pension program.

A clever argument, yes, but with one small problem: It's not true. According to the independent Congressional Budget Office, the projected surplus over the next 10 years is $5.6 trillion. It doesn't take a math major to figure out that a $1.6 trillion tax cut is small compared to all the extra tax money that will roll into Washington.

In other words, Congress could approve the entire Bush tax cut and still have about $4 trillion left over. And this estimate is unrealistically low, as it doesn't include the additional tax revenues that will flow from a stronger economy. Lower tax rates lead to more jobs and higher incomes-which in turn generates more tax money. Famed Harvard University economics professor Martin Feldstein predicts that, once this "supply-side" effect is taken into account, the real size of the tax cut falls to a little over $1 trillion.

But let's assume a worst-case scenario: that not only will the tax cut use up the full $1.6 trillion, but Congress will squander another $1 trillion on government programs. Pulling out our trusty calculators, we add these two figures together, subtract them from the $5.6 trillion surplus, and we're left with $3 trillion.

This brings us back to the assertion that tax cuts somehow will prevent lawmakers from fixing Social Security. Sticking with our worst-case scenario, is $3 trillion enough money to save Social Security?

The answer is a resounding yes. As a matter of fact, it wouldn't matter if the surplus disappeared overnight. Social Security reform is not, at its core, a general budget issue. It's a demographic issue: The old-age system needs to be updated with personal retirement accounts to keep it from going bust.

Under current projections, Social Security is expected to accumulate a deficit of at least $21 trillion between 2015 and 2075. Personal accounts can substantially reduce that unfunded liability, since many workers would no longer need to rely on monthly checks from the government.

This explains why Social Security reform doesn't depend on whether we have a surplus today. Having $3 trillion in surplus revenue would help, of course. It could be used to guarantee full benefits to current retirees and older workers while permitting younger workers to join a better system.

But a surplus is a convenience, not a necessity. Dozens of countries around the world have shifted to personal retirement accounts-many of them at a time when they were not running a surplus. They made the change, however, because they realized that private accounts are the best way of providing security and comfort to the elderly.

They also realized that it's a good way to save money in the long term. Social Security reform, after all, is like refinancing a house when interest rates go down. Yes, it may cost a little money in the beginning to ensure full benefits for retirees, much as a family might pay "points" and other closing costs to get a new mortgage. But taxpayers will save a huge amount of money when Social Security becomes self-financing, just as families can lower their long-term costs with lower-rate mortgages.

In the final analysis, though, Social Security reform is not about numbers. Personal accounts ensure that today's workers can enjoy a safe and comfortable retirement. By allowing younger workers to shift some of their payroll tax to private accounts, federal lawmakers could allow them to accumulate a substantial nest egg based on real savings, not political promises.

Social Security reform will be easier with a surplus, and the President's plan certainly leaves a big pile of money to help make this happen. But the program needs reform regardless of current budget projections. Sorry, tax-cut foes-you'll have to come up with a better argument. Road rage, anyone?

Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation (www.heritage.org).

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Taxes

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