President Bush drew a welcome line in the sand recently when he said there would be no increase in payroll taxes to pay for Social Security reform.
This soon set much of the status quo into a dither – including, apparently, some senior Bush officials. Senate Democratic Leader Harry Reid of Nevada told the Associated Press: “(W)e need to be careful not to approve a plan that requires deep benefit cuts or massive increases in debt.” Sen. Grassley, R-Iowa, Chairman of the Senate Finance Committee, which would shepherd any reform plan through the Senate, says tax increases should be considered as a way to pay for the transition costs of moving from a public to a private system. Grassley echoes a call by Sen. Lindsey Graham, R-S.C., for lifting the limit on income subject to Social Security payroll taxes from $87,900 to $200,000.
Why is it that the first instinct of Beltway types is to raise taxes?
According to the Office of Management and Budget in July: “The deficit for 2004 is now estimated at $445 billion, or 3.8 percent of GDP, down $76 billion from the $521 billion, or 4.5 percent of GDP, estimate last February.” In other words, in five months the deficit dropped dramatically. Economic growth means more workers and profits, which means more revenues for government.
Let’s get back to deficits. Since the Reagan tax cuts of 1981, the highest the deficit has been as a percent of GDP has been 6 percent. And that year, 1983, saw the economy growing at whopping 6 percent.
Now, jump ahead to 30 years, when the Social Security trust fund is scheduled to start running a deficit. If the last 30 years are any guide, gross domestic product will then be about $25 trillion, roughly two-and-a-half times what it is now. What is 6 percent of that amount? $1.5 trillion a year. The estimated cost of moving Social Security to private accounts is between $2 trillion and $3 trillion.
So the transition costs are affordable – if we have a strong, growing economy. That’s exactly what we will have – if we do Social Security reform right.