Raising the Soc Sec Cap: Bad policy, worse politics, worst economics
by Bruce Webb, Wed Nov 14, 2007 at 07:35:31 AM EST
Lifting the cap on Social Security is widely seen among progressives as a "no brainer. Well sorry that view is simply wrong. At least once you examine the actual numbers in play and think through the financing. Detailed arguments after the jump, the abbreviated version here:
On Policy. Raising the cap actually opens the door for privatization. Obama's economic advisor Jeffrey Liebman is pushing the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan which uses a cap increase to help fund PRAs-Personal Retirement Accounts. This Plan is very worker unfriendly and predictably this is more true as you work down the income scale.
On Politics. Raising the cap simply serves to alienate potential progressives who happen to be successful. Do we really need to alienate every tenured professor, every labor lawyer, every head of a social service non-profit in the country while giving capital a pass? Raising the cap while providing no other benefit is designed as a wedge issue.
On Economics. Raising the cap actually works to weaken Social Security going forward. Taken to extremes it amounts to abrogating the Trust Fund and so stealing all of the surpluses accumulated to date. Moreover the current system is not regressive, thinking that it is is just to fall into a frame established by privatizers.
I'll take the Economics piece first, leaving Policy and Politics for later.
The Social Security Trust Fund is often thought of as a Savings Account. Under this conceptualization raising the cap and putting the resulting funds into it seems a simple matter of topping off the account for a rainy day. Well that is not really how it works. Social Security taken as a whole works more like a Checking Account with dollars being deposited every payday and checks written out. The Trust Fund itself serves as the Balance, an amount held in Reserve for expected and unexpected contingencies. By law the Social Security Trustees are supposed to target Short Term Actuarial Balance, meaning at least a year in reserves for each of the next ten years. By that measure the combined OAS and DI Trust Funds are currently in balance and are projected to remain so until about 2027.
While the Trust Fund could hold assets in other asset classes it currently holds them in the form of interest earning Special Treasuries. Given that the system is running high levels of surplus today and for most of the rest of the decade the effect of raising the cap is simply to lend even more money to the General Fund with the side effect of creating a greater interest burden going forward. Certainly you can push back the date of shortfall but only at the risk of creating every greater tension between the General Fund and the SS Trust Fund.