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February 14, 2005

Sebastian Mallaby Sees Most of It

The big thing wrong with Bush's version of the private accounts proposal:

washingtonpost.com: The Flaw in Bush's Plan: The leading reform proposal in Bush's first term said that individuals could set aside 4 percent of their pay (up to the payroll tax cap, currently $90,000) in personal accounts, but that the maximum anyone could set aside per year was $1,000. In his new proposal, however, the president added a promise to phase out that $1,000 cap. This may sound like an innocent change. But it turns a plausible plan into a crazy one. The phaseout kills the progressivity in personal accounts. Under the old proposal... the opportunity to earn superior investment returns was to be concentrated among workers who most needed it. But if Bush phases out the $1,000 cap, that progressivity will ultimately be eliminated....

Why? In an uncapped system, high earners get big personal accounts; in return, they accept commensurately big cuts in their traditional benefits... by 2075 high earners' traditional benefits might be reduced -- get this! -- to zero. Fully 100 percent of their Social Security benefits would come from the new personal accounts....

Because high earners' traditional benefits would zero out, you can't push them down enough to compensate the Social Security trust fund for their diverted payroll taxes. Full compensation might require a high earner to accept a traditional benefit reduction of perhaps $32,000 per year. But if the traditional benefit is worth only $22,000, the high earner will pocket a subsidy of $10,000 a year at the expense of the budget and of poorer workers.

But the scariest implication... is political. If high earners were to draw nothing from the traditional Social Security program, it would not be sustainable. The high earners would be... shelling out a payroll tax of 8.4 percent to the government, which would be perceived to purchase nothing. How long would the residual Social Security system survive under these political conditions?... [T]he best fix for the $1,000 cap problem would be simply to put it back on the table. Junking the cap was a fateful mistake in an otherwise promising proposal.

What Sebastian Mallaby doesn't see--or pretends he doesn't see--is that the thing that changes the proposal from "plausible" to "crazy" isn't a mistake, isn't a bug. It's a feature--probably the feature. To theWest Wing, the point of the whole exercise is not to reform but to destroy Social Security. Eliminating the defined-benefit component, removing progressivity, and undermining political support for the remnants of the program are all things that the West Wing wants to see happen.

Posted by DeLong at February 14, 2005 08:28 AM