The Moynihan Plan -- Social Security Tax Proposal Creating Thrills And Chills
WASHINGTON - At last, Social Security is fixed - and fixed for a long time. So said experts and politicians from both parties in 1983, when President Reagan and Congress agreed on a far-reaching plan to raise enough new taxes to ensure the payment of retirement benefits to the baby-boom generation in the 21st century.
Now that accord may unravel, thanks to a stunning proposal by one of the pact's original authors, Sen. Daniel Moynihan, D-N.Y., to cut the Social Security payroll tax by up to $600 a year for a couple.
Moynihan is no enemy of the elderly or of the Social Security system. As chairman of the Senate subcommittee that oversees Social Security, he is renowned for his steadfast support of the pension program.
He is proposing, however, to undo the 1983 compact because the nation is not using the surplus to save for baby-boom Social Security, but instead is paying today's deficit.
And, he argues, the Social Security payroll taxes flooding into the Treasury mask the true size of that deficit. By stopping that flood, policy-makers would be forced to deal with the deficit.
In 1983, the bipartisan Social Security commission - of which Moynihan was a member - thought it had found a good way to prevent Social Security from going bankrupt and provide for the baby boomers' old age. The $12 trillion surplus that was supposed to be in place in 2030 wouldn't disappear entirely, as it was spent on retirement benefits for baby boomers, until 2046.
But they did not reckon on the debt binge of the remaining Reagan-Bush years.
In fact, the administration and Congress have been averting tax increases or what would be painful cuts in spending programs by dipping into the Social Security surpluses. Those surpluses are being used to buy Treasury bonds and Treasury bills - the Treasury then uses the cash to cover the operating deficit of the federal budget.
So the mountain of money actually is a mountain of IOUs, as Isabel Sawhill of the Urban Institute puts it.
``This is totally unacceptable,'' said Moynihan, asserting that the Treasury's payroll-tax windfall is in effect being used to purchase tanks, pay the salaries of FBI agents and meet other current federal expenses - all because income-tax revenue is insufficient to cover those costs.
As a result, he added, ``The United States almost certainly now has the most regressive tax structure of any Western nation,'' because the payroll tax hits average working people harder than rich people.
Adds Rep. Byron Dorgan, D-N.D.: ``You wouldn't get five sober votes in Congress for a proposition to raise Social Security taxes and offset general revenue expenditures or deficits with the money, yet that's exactly what's been happening.''
For example, in fiscal 1989, according to the Congressional Budget Office, the operating budget deficit was $204 billion and the Social Security surplus was $52 billion, leaving a net budget deficit of $152 billion. If Congress succeeds in 1993 in eliminating the overall federal deficit as required by the Gramm-Rudman-Hollings Act, it will do so only because a $99 billion deficit in the operating budget is offset by the $99 billion Social Security surplus now foreseen for that year.
Robert Reischauer, director of the Congressional Budget Office, explained in testimony last year that when the baby-boom generation retires and the time comes to start honoring the IOUs, ``the Treasury would have to borrow from the public, or the government would have to cut spending or raise taxes elsewhere in the budget'' to pay Social Security back for the bonds and allow it to use the money for benefits. People working at the time could end up paying a heavy tax burden just to redeem the bonds.
Moynihan's proposal would cut the payroll tax by more than $50 billion a year starting in 1991. It has sparked an impassioned debate that is quickly taking center stage in the battle between the Bush administration and Congress over spending and taxes.
Bush has denounced Moynihan's proposal as ``a charade'' and said it was really an attempt to force him to raise other taxes.
``It's an effort to get me to raise taxes on the American people by the charade of cutting them, or cut benefits, and I am not going to do it to the older people of this country,'' he said.
The tax, Moynihan contended, should be lowered to the point where it is just adequate to pay the benefits of current retirees.
Even those who applaud the senator believe Moynihan is using political theatrics to drive home his point about the folly of the nation's fiscal affairs. But whatever his intentions, his proposal is rapidly gathering momentum and threatens to produce far more than shock value.
Experts say the political appeal of a tax cut may prove irresistible, forcing Republicans and Democrats to scramble aboard the bandwagon.
``The business community will flock behind this thing,'' said one senior administration official, noting that employers pay half of the payroll tax and thus would get half of the tax relief. ``And if you've got the left and the right flanks stampeding, the middle seldom holds.''
The payroll tax rose to 7.65 percent Jan. 1 from 7.51 percent, and it is levied on wages up to $51,300 instead of $48,000. That means a wage-earner could pay as much as $3,924 in Social Security taxes this year, an increase of about $319 from 1989.
The right and left flanks already have begun to rally behind Moynihan. Conservative organizations such as the Heritage Foundation have embraced the idea partly because it would curb the resources available to the federal government.
A number of liberals, such as Robert Borosage, policy director for the Rev. Jesse Jackson's 1988 presidential campaign, have endorsed the proposal as a boon for the middle class.
And Ed Lopez, a Moynihan aide, said several Democratic senators have privately indicated their support because they ``see it as a good liberal tax cut for working people, which makes a good counter to (President Bush's proposal to cut taxes on) capital gains.''
Senate Democratic Leader George Mitchell, D-Maine, appearing on ABC's ``This Week with David Brinkley'' Sunday, called for more study of the Moynihan proposal, but said he was likely to endorse it.
``I think there's a growing groundswell of support for it in both Democratic and Republican parties in the Congress and around the country,'' Mitchell said. ``We may well endorse it once we get the details of the plan and, most importantly, determine the impact on the deficit.''
However, the probable shock to the budget system that such a cut would cause has prompted reservations from House Speaker Tom Foley, D-Spokane.
``If I had to make a decision today to do it or not do it, I'd probably say, `don't do it,' '' Foley said on NBC's ``Meet the Press.'' ``We'd have a problem, if we cut the tax, of having a very large increase in the federal deficit.''
Moynihan says he favors a tax on gasoline and a cut in defense spending to help make up for the revenues the government would lose if a social-security tax cut went through.
Many economists think Moynihan's proposal is seriously misguided. Besides substantially worsening the deficit outlook, it could wreck any hope that the baby boomers will finance their own retirement rather than push the cost off onto their children.
``It's bad economics, bad social-insurance policy and bad politics,'' said Henry Aaron, a senior fellow at the Brookings Institution, who became so exercised over Moynihan's proposal that he has recruited a number of his colleagues to denounce the plan.
At stake in the debate is what many analysts consider the central economic issue facing the United States as it enters the 1990s: whether, and how, the nation can reverse the deficit-driven buying binge of the past decade and become a society that saves more of its resources for the benefit of future generations.
And some budget experts assert that it would be wrong to scrap the 1983 Social Security compact and abandon its promise of an equitable, adequately financed retirement policy.
That is the argument advanced by the Bush administration. Michael Boskin, chairman of the Council of Economic Advisers, contended in an interview that because of the enormous size of the baby-boom generation, ``You've got to build up the reserves to avoid the necessity of an oppressive tax increase or cut in benefits in the future.''
The administration has drafted a complex proposal that is aimed at satisfying many of Moynihan's concerns about the abuse of the Social Security trust fund.
It would use the threat of across-the-board spending cuts under the Gramm-Rudman-Hollings law to effectively require the government to incur large budget surpluses in the mid-1990s and thereafter. At that point, the Social Security reserves would be used to reduce the national debt.
It would be a shame, Boskin said, to simply discard the 1983 pact instead of trying to make it work properly.
``The 1983 reforms,'' he said, ``were one of the few times the government has really been responsibly forward-looking, anticipating future obligations and placing a financially sound program in place to deal with them.''