A few weeks ago, Rep. Rahm Emanuel (D-Ill.), chairman of the House Democratic Caucus, published an op-ed in The Wall Street Journal calling for a “universal savings account,” funded by a 1 percent contribution (read: “tax”) on income from both employers and employees. These personal accounts in private financial institutions would grow over time, similar to what free market economists and policy experts have pushed for years as the solution to Social Security's coming financial crisis.
That’s probably why some proponents of Social Security reform have hailed Emanuel’s proposal as a possible compromise to fix Social Security.
It’s true that Emanuel’s proposal recognizes the importance of harnessing the strength of market rates of return in addressing the retirement needs of America’s workers. But that’s where the good news ends.
There are several problems. First, it’s a tax increase of 2 percentage points of worker compensation, or a 16% increase in payroll taxes. And while an increase in payroll tax rates hits all workers, it affects average income workers disproportionately, since for most workers the largest tax they pay is the payroll tax, not the income tax.
Even worse, Emanuel’s proposal does nothing to restructure Social Security to address its long-term unfunded liability crisis. His watchword here is “supplement, not supplant.” This proposal for “add-on” accounts simply raises taxes and pushes the Social Security problem into the future for our children and grandchildren to fix.
The question for Emanuel is this: If market rates of return are a good thing, why not expose all or a significant part of workers existing Social Security payroll taxes to market rates of return through personal accounts? There is no reason why the government couldn’t guarantee that workers would receive their scheduled benefits regardless of market performance, since Social Security already guarantees Social Security benefits to 100% of workers now. So the “what if the market tanks?” question can easily be taken off of the table.
Rather than seeing the Emanuel proposal as a basis for compromise, Republicans who back personal Social Security accounts should ask an important question: If Democrats are now willing to trust personal accounts as a safe means of saving for the future, then why not for Social Security?
Hopefully, Social Security reformers won’t be seduced by this false compromise.
Instead, Emanuel’s proposal is an opening to ask: Why not let people get market rates of return on their existing Social Security payroll taxes?