Moment of Truth report written by
Alan Simpson and
Erskine Bowles is the end product of the President’s
National Commission on Fiscal Responsibility and Reform. This report puts
forth a set of recommendations that purport to deal with the federal deficit
and debt problems in a comprehensive way. Of particular interest in this
report are the recommendations regarding Social Security,
revisions of the tax code.
Concerning Social Security, the Simpson-Bowles
recommendations are summarized in Figure 1. They contain five key
Gradually phase in progressive changes to the benefit formula while
increasing the minimum benefit and adding a longevity benefit. (29%)
retirement age and earliest eligibility age to increase with longevity.
chained CPI rather than the standard CPI to adjust benefits for changes in
the cost of living. (26%)
Gradually increase the income cap to cover 90% of wage income. (35%)
newly hired state and local government employees to the program after 2020.
The percentage in parentheses following each item indicates
its contribution toward eliminating the expected shortfall in Social Security
funding over the next seventy-five years.
Figure 1: Summary of Social Security Reform from Moment Of
Moment of Truth Report.
The first element combines the first, second, and forth
items in Figure 1 where the savings are supposed to be achieved by
making the benefit payout system more progressive—that is, by lowering the
benefits paid to high income recipients while, at the same time, increasing
the benefits paid to low income recipients. This suggestion is rather
disingenuous, however, in that the savings come from a net cut in benefits to
the higher wage earners, not from the fact that the resulting payout scheme is
more progressive. If the increase in benefits paid to low wage earners were
equal to the decrease in benefits paid to higher wage earners there would be
no savings from this adjustment in progressivity.
The second item obviously achieves the savings, without any
pretext, through a straightforward
across the board cut in benefits by increasing the
retirement age. The third also achieves the savings by cutting benefits by
way of a controversial change in the way the Social Security cost of living
adjustment is calculated. (WSJ
SGS) The last two achieve their savings by increasing
the payroll tax base.
Thus, when we do the math, we find that these
recommendations solve Social Security’s future revenue problem by cutting
benefits to cover 73% of the expected shortfall and by expanding the tax base
to cover an additional 43% of the shortfall. (Presumably, the redundant 16%
of savings is there to maintain the Social Security trust fund that will be
lent to the government.) According to
Bowles, if we accept their recommendations Social
Security will be on a sound financial footing for the next 75 years.
It is worth noting, however, that if these recommendations are
implemented they will have the
effect of converting Social Security from an insurance program in which the
vast majority of the participants benefit, into a
welfare program for the elderly in which mostly the
poor benefit, and those who pay most of the payroll taxes get much less out of
the program than they pay in. The extent to which this is so is indicated in
Figure 2 which shows the expected payout under the current law and how
the payout structure would change under the Simpson-Bowles recommendations.
This is not Social Security as we know it.
Even worse, the Simpson-Bowles scheme proposes to fund this
welfare program through the payroll tax. The payroll tax is one of the most
regressive taxes there is. It is levied only on earned income (income
received from wages and salaries) with no deductions and only minor
exemptions, and the total amount of earned income taxed is capped where
today's cap is $106,800. It is not levied on unearned income (income
received in the form of interest, dividends, capital gains, rent, and
corporate profits) or on earned income above the $106,800 cap. As a result,
virtually all of the income of low income families is subject to the Social
Security tax since virtually all of their income comes from wages and
salaries, while virtually none of the income of the wealthy is subject to this
tax since virtually all of their income is either above the cap on earned
income or comes from unearned income.
Figure 2: Social
Security Payout Structure.
The payroll tax is hardly an equitable way to finance a
welfare program. The burden of financing a welfare program should fall
heaviest on those who can afford to pay, not on the backs of the working poor
as is the case when the payroll tax is used. It makes sense to use a payroll
tax to finance to an insurance program. It does not make sense to use a
payroll tax to finance a welfare program.
In dealing with
healthcare, the main thrust of the Simpson’s-Bowles recommendations is to
reduce healthcare costs by forcing healthcare recipients, both public and
private, to pay a larger proportion of the cost. But this plan can only
reduce costs to the extent it forces those who cannot afford the added costs
out of the healthcare system since to the extent the government picks up the
tab for those who cannot afford the added cost there is no saving.
This begs the
question: How many of those who cannot afford to pay the added costs should be
allowed to die for want of healthcare in order to minimize the cost of
healthcare for those who can afford to pay? It is the ultimate death panel
plan whereby those who cannot afford the added costs are allowed to die. The
only alternative is for government to pick up the tab for those who cannot
afford to pay which will inevitably
increase the cost of healthcare for the government as more and more people are
unable to pay and forced out of the private system.
As with the
Simpson-Bowles recommendations for Social Security, the end result is not
Medicare as we know it.
Reforming the Tax Code
What is particularly disturbing about the Simpson-Bowles
bipartisan plan for deficit reduction, however, is that while they recommend
massive cuts in Social Security and Medicare benefits, at the same time they
recommend the top marginal income tax rate paid by corporations and the
wealthy be cut from
35% to 28%, that the marginal income tax rate paid by
middle-income earners be set at
22%, and that the lowest income tax rate paid by the
not so wealthy be increased from
10% to 12%.
It these changes are passed into law, the combined
15.3% employee/employer payroll tax rate plus the
income tax rate in the lowest income bracket will equal 27.3%—less than one
percentage point below the 28% marginal rate corporations and
multibillionaires will pay. Those in lower end of the middle tax bracket will
face a combined marginal rate of
37.3%—9.3 percentage points above the
marginal rate multibillionaires and corporations will pay. Even though
Bowles also recommend treating dividends and capital
gains as ordinary income and recommend a few other changes that will make the
tax code somewhat more progressive, there is something very wrong here.
There was a surplus in the federal budget equal to
2.4% of GDP in 2000 before the massive
2001-2003 Bush tax cuts, before the invasion of Iraq,
and before those who ran our
financial institutions devastated our economy by
selling securities backed by fraudulently obtained subprime mortgages all over
the world. The fiscal problems we face today are clearly the result of the
Bush cut taxes combined with the increases in defense expenditures squandered
in Iraq and the devastating recession brought on by the fraudulent, reckless,
and irresponsible behavior of
our financial institutions. Social Security and Medicare had nothing to do
And now—in the name of fiscal responsibility—we are
supposed 1) cut Medicare benefits and increase the private cost of healthcare
dramatically, 2) convert Social Security into a welfare program paid for with
payroll taxes in order to avoid paying an increase in benefits equal to 2% of
GDP, and, at the same time, 3) give additional tax cuts to those at the top
of the income distribution, many of whom made fortunes out of the Iraq war and
as they perpetrated
the greatest fraud in history in the process of
devastating our economy? And to add insult to injury, we are also supposed
to increase the taxes paid by those in the lowest income tax bracket? This
not only defies common sense, it defies common decency.
The federal deficit is the problem, and the Simpson-Bowles
report does not deal with this problem in a substantive way. There is no
discussion as to how optimum level or quality healthcare can be provided to
the population in the most cost effective way in their report. No
discussion as to how Social Security and Medicare can be maintained as viable
insurance programs. No discussion as to how the optimum level of
essential government services can be made available in their most cost
effective manner. This report concentrates only on cutting government
services and lowering tax rates paid by the upper-income groups. This is
just more of what we have been doing for the past 30 years, and it simply
hasn’t worked. Why would anyone expect it to start working now?
It does serve the ends of those who just want their taxes
cut and who have the wherewithal to lobby their special interests through
Congress—those who don’t care about the national debt or government programs
that provide for the common good so long as they get what they want out of the
government and don’t have to pay taxes— but it does not serve the ends of the
vast majority of the American people who want better public education, better
healthcare and public health, better and safer streets, a cleaner and safer
environment, protection from predators who would fraudulently take advantage
of them, safe food and drugs and consumer products, safe working conditions,
social-insurance programs such as Medicare and Social Security, and a stable
economy that is not plagued by cycles of booms and busts brought on by
epidemics of fraud in our financial system
that drive our country and people deeper and deeper into debt and lead to the
kind of economic catastrophe we are in the midst of today.
These are all things that good government provides, and
concentrating on cutting government services and lowering the tax rates paid
by the upper-income groups in our society does not provide good government.
It does not lead to a government that promotes the common good and creates
economic prosperity. It leads to a government that
promotes the special interests and leads to economic
disaster. This should be obvious to anyone who has paid attention to what
has been going on in our country for the past 30 years. Doing the same thing
over and over again and expecting a different result is not the way to solve
the deficit problem and provide good government.
The only way to solve the deficit problem is to provide the
government services that the people demand, and then collect the taxes
necessary to pay for those services. This isn’t very complicated, and it
could be done quite easily by
rescinding the 1981 tax cuts—except for the
lowest two brackets to compensate for the way in which the taxes of those in
these brackets have increased over the past 30 years—while at the same time
changing the tax code to treat capital gains and dividends as ordinary income,
using the proceeds to mitigate the effects of the recession on the deficit
and to put people to work rebuilding the public infrastructure we have allowed
to decline over the past thirty years—that is to say that we must increase
controlling defense expenditures in a responsible
eliminating unwarranted tax deductions and credits, and
with our escalating healthcare costs by either extending Medicare to the rest
of the population or, at the very least, by adding a
public option to the
Patient Protection and Affordable Care Act. It will,
of course, also be necessary to reregulate our financial institutions to keep
them from creating in the future the kind of mess
they have created throughout history when unrestrained
by government regulation, the kind of mess that has brought us to where we are
Rescinding the Bush tax cuts and treating capital gains and
dividends as ordinary income would give us a tax structure comparable to that
which yielded a surplus equal to 2.4% of GDP in 2000 when the economy was near
full employment. It would not necessarily give us a surplus today, but it
would at least give us a tax structure that is viable—one that would make it
possible to pay down the national debt when we recover from the current
recession. It would also make it possible to pay for the government services
the people demand, such as Social Security and Medicare, without having to
destroy these programs.
Extending Medicare to the rest of the population would make
it possible to control healthcare costs while at the same time providing
quality healthcare to the entire population. We spend more
per person and as a
percent of GDP than any other country that has better
health statistics than we do. At the same time, we rank
51th in terms of life expectancy,
51st in terms of infant mortality,
24th in terms of the availability of
37th in terms of the overall performance of
our healthcare system.
Our multiple third-party payment system, whereby providers
decide what services patients need and how much to charge while insurance
companies or the government pick up the tab virtually guarantees continually
deteriorating quality and increasing costs since there is no incentive in this
system to deliver quality healthcare services in a cost effective manner. It
also virtually guarantees that either our health statistics will deteriorate
or a continually increasing share of the healthcare costs will be passed on to
the government as these costs rise and fewer and fewer people are able to
afford these rising costs.
Every advanced country in the world that has better health
statistics and lower healthcare costs has abandoned the cost ineffective
multiple third-party payer system for a
single-payer, universal healthcare
system that provides government subsidized healthcare for all—paid for through
taxes—where costs are controlled through government negotiated prices. They
pay higher taxes than we do, but their higher taxes are more than offset by
the savings in insurance premiums and lower healthcare costs—not to mention
the fact that they are healthier than we are, and they live longer than we do.
The simplest, most efficient, and most cost effective way
to provide a comparable system for the United States would be to extend the
Medicare program to the entire population. This program works, and the
institutions necessary to run it are already in place. It would take very
little effort to retool Medicare to meet the needs of the entire population
compared to the massive and wasted effort it is going to take to implement the
Patient Protection and Affordable Care Act.
And there are many ways to deal with the Social Security
problem within the above framework that do not entail converting Social
Security into a welfare program. One would be to
Increase the payroll cap
to apply to 90% of covered earnings
as Congress intended back in 1977 or,
perhaps, to an even higher percentage.
Convert the federal estate tax to a
dedicated Social Security tax that is
credited automatically to the Social Security trust fund.
Expand the program to cover newly hired
state and local workers.
Implement modest changes in payroll taxes and Social Security benefits if
needed after the above changes have been made and, perhaps, extend the
payroll tax to include unearned income.
Approaching the expected Social Security deficit problem in
this way would not require the draconian cuts in benefits put forth in the
Moment of Truth Report nor would it require draconian
payroll tax increases. I suspect the vast majority of the American people
would support this approach if given the choice. Instead, they are given the
false choice between 1) accepting a solution that will convert Social Security
into a welfare program and increase the private cost of healthcare—a policy
that will not reduce costs unless we deny healthcare to those who cannot
afford to pay—or 2) letting the deficit
and national debt grow without restraint until the system collapses. This is
a false choice, and it should be recognized as such.
The real choice facing the American people today is weather
to 1) increase taxes and reorganize our healthcare system and thereby maintain
Social Security and Medicare or 2) not increase taxes and cut Social Security
and Medicare along with other essential government services. The only other
option is to continue to increase the national debt until the burden becomes
For a more in depth examination of the issues raised by the
Moment of Truth report written by
Alan Simpson and
Erskine Bowles see
Social Security, Healthcare, and
Did All the Money Go?,
The Federal Budget. For
an explanation of why
we are faced with the false choice put forth by Simpson and Bowles, see
It Makes Sense if You Don't Think About It.
Where Did All the Money Go?
The Federal Budget.
Where Did All the Money Go?
It Makes Sense if You Don't Think About It.