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Will Obama Raise Taxes to 'Fix' Social Security?

President Obama says he wants to fix Social Security, but by ruling out both benefit cuts and investing in real assets, he leaves only one possibility: a massive, unprecedented tax hike. How big a tax hike? At least $5.4 trillion (for a 75-year “fix”) and at least $16 trillion or even more to permanently balance the books. Yikes.

Last year’s report from the trustees of Social Security indicated that the program has an unfunded liability of $5.4 trillion over the next 75 years, and an unfunded liability of $16.1 trillion through the “infinite horizon.” That means that if no other changes were made, we would have to set aside $16.1 trillion right now for Social Security to be able to afford all its future benefit promises.

In fact, that understates the program’s fiscal difficulties, because as the Congressional Budget Office revealed earlier this month (on page 140 of this report), Social Security is already cash-flow negative. That means it is already drawing down its national trust fund balance of about $2.5 trillion from the general treasury. But that trust fund balance – “borrowed” by Congress from Social Security – has already been spent, and now must be replaced with funds coming from elsewhere in the strapped federal budget.

In his State of the Union address, Obama said:

"To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. We must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market."

There are three options for closing this gaping multi-trillion dollar gap between what Social Security has promised and what it is able to pay: raise taxes, cut benefits, or invest in real assets that earn a higher rate of return. Obama wants to rule out both benefit cuts and real investment (ironic in a speech that tried to justify good old federal spending by calling it investment). That leaves only the option of economically-crushing tax hikes.

Contrast that with a very different Democratic president, Bill Clinton, in his 1999 State of the Union. Clinton said:

"The best way to keep Social Security a rock-solid guarantee is not to make drastic cuts in benefits, not to raise payroll tax rates, not to drain resources from Social Security in the name of saving it. Instead, I propose that we make an historic decision to invest the surplus to save Social Security… This will earn a higher return and keep Social Security sound for 55 years."

Unfortunately, the surpluses are gone – squandered on unrelated federal programs – and now Social Security is permanently in deficit. That makes it harder to transition to a system of real investment, but not impossible. Ideally, deep cuts in other federal spending should be used to pay back what was taken from Social Security and to finance benefits for workers at or near retirement so the Social Security dollars of younger workers can be invested in real assets for their retirement.

The real investment option is clearly superior to a massive tax hike both economically and politically. It is the pro-growth, supply-side alternative to the austerity approach, giving workers a better deal by boosting capital formation and growing the economy.

Real investment could be centrally managed like a pension, as President Clinton proposed, or it could reside in individual accounts that workers own and control. The account concept would reduce the potential for bureaucratic mischief and interference in capital markets, and avoid some of the problems that large state pension funds now face.

Individual accounts took a political hit when Americans saw their 401(k) accounts take an enormous hit in the financial crisis. But most Americans have more confidence in themselves to make sound financial decisions than they do in either Washington politicians or Wall Street insiders. A properly-designed account option would give workers a choice to exercise that control if they are comfortable with it.

A recent analysis by Bill Shipman and Peter Ferrara showed that if a typical worker had chosen an individual account option, worked his whole life, stayed entirely in the stock market (instead of shifting toward bonds near retirement as most workers would do), and retired at the depth of the market meltdown, he still would have earned a retirement benefit 75 percent higher than Social Security promises – let alone what it can afford to pay.

President Obama wants to take that pro-worker option off the table, and instead adopt a $16 trillion tax hike just to keep in place a system that’s already a bad deal for workers. Workers should demand better.

Mr. Kerpen is vice president for policy at Americans for Prosperity.

Phil Kerpen is the founder of American Commitment Action Fund, on the web at www.BookerFAIL.com.