On Social Security, A Nixon-To-China Moment

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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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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