On Social Security, A Nixon-To-China Moment

By Sep 12, 2011, 9:11 AM Author's Blog  

It took a former supreme Allied commander, President Dwight Eisenhower, to confront what he called the “military-industrial complex.” It took President Lyndon Johnson, a Southern Democrat, to push the Civil Rights Act through Congress.

And it took President Richard Nixon, who built his career on anti-communist rhetoric, to open relations with Communist China and to relax Cold War tensions with the Soviet Union. In politics, these events – a major change promoted by a leader whose background would make him more naturally a defender of the status quo – have become known as “Nixon to China” moments.

President Obama has just had his Nixon to China moment on Social Security. I suspect that, in the long run, it will be by far the most significant item in his jobs proposal last week.

Flash back six years: In 2005, President George W. Bush wanted to allow workers to divert part of their Social Security taxes into private accounts that they would control. This would have cut into the cash flow that Social Security uses to fund benefits for current retirees, bringing the program closer to the point where it must either cut benefits or dip into the Treasury’s general revenues. But it would have created a truly self-sustaining vehicle in the private accounts, finally putting some truth into the myth that workers fund their own retirements through the taxes they pay under the misleadingly named Federal Insurance Contributions Act (FICA).

“Social Security faces a challenge, not a crisis,” Rep. Sander Levin, D-Mich., told The Washington Post in a typical comment at the time. “Diverting over $2 trillion from the trust fund into private accounts, as suggested by the president, does not address Social Security’s challenge 40 to 50 years from now. Indeed, it would make it far worse.”

Back to the present: Obama, together with last year’s Democrat-controlled Congress, crossed the FICA Rubicon with a decision to cut workers’ payroll taxes by 2 percentage points in 2011 in order to stimulate the economy and create jobs.

It didn’t work. Meanwhile, in his attempt to reach a grand bargain with congressional Republicans on reducing federal deficits and debt this summer, Obama agreed to consider what he called modest reductions in Social Security benefits – another line Democrats had previously refused to cross.

But it was in Thursday’s speech to Congress that the president all but said that this is a new world, one in which Social Security’s needs must compete with other pressing national interests. He proposed cutting FICA taxes in half next year for employers and their workers, with additional breaks for businesses that hire new staff or give raises to current employees.

Where Bush wanted to cut Social Security revenues so workers could save for their own retirements, Obama proposes to cut Social Security revenues so workers will, he hopes, go out and buy things – cars, clothes, toasters, more expensive college tuitions, whatever.

So what does Rep. Levin think?

“The president tonight stepped up to the plate with an urgent plan of action on jobs,” the Michigan Democrat said in a statement following Obama’s speech. “Now it is time for Republicans to move from their plan of complete inaction and begin working with Democrats to jumpstart our recovery. The livelihoods of far too many Americans are at stake.”

Neither Obama, nor Levin, nor anyone else has yet said exactly what would happen when the “temporary” tax cut expired, at the end of 2012, with the president’s hoped-for re-election safely behind him. But unless the economy is roaring ahead by then, which is unlikely, Congress would be under heavy pressure to extend the lower rates, just as the Democratic-controlled Congress reluctantly extended the Bush-era income tax rates last December.

The Social Security “trust fund” about which Levin no longer seems very concerned was always a fiction. It has been a pay-as-you-go retirement program since the first dollars were paid out. Now Obama, like Bush, proposes to change that – but Obama’s approach just changes Social Security, for now, into a borrow-as-you-go program. In other words, he treats it as just another government endeavor, which must compete for available funds with every other federal priority.

This is why many, though not all, Republicans are likely to back the Obama FICA tax holiday. Most Republicans won’t say it as bluntly as Texas Gov. Rick Perry, but they basically agree with him that Social Security’s current structure is a Ponzi scheme, if not a “monstrous lie.”

They have been unable to break down the erroneous perception that Social Security recipients paid for their own benefits. Obama now has done that. By proposing cutting workers’ FICA taxes without cutting either current or future benefits, Obama shattered the illusion that Social Security is anything but a cash transfer program.

Now the stage is set for an honest discussion about who should get Social Security cash transferred to them and how much they should receive. It won’t happen right away, but over time, we are likely to see retirement ages raised, benefits lowered (at least in inflation-adjusted terms) and entitlements “means-tested,” meaning people with more than certain amounts of income or assets will get little or nothing. Federal retirement pensions will ultimately be viewed as a subsistence-level supplement for people who either did not or could not put away enough to sustain themselves in their old age.

As for the rest of us, I suspect Obama’s proposed FICA tax holiday will work out pretty much as George W. Bush proposed: We’ll save it rather than spend it, or use it to pay down debt (which is another way of saving it). It will be the private accounts Bush wanted in all but name.

President Obama, welcome to China.

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