The Time for Social Security Reform Is Now

With the payroll tax holiday set to expire in March, there seems to be little doubt on either side of the aisle that the forthcoming negotiations will result in an extension of the 2% payroll tax cut through the end of the year.

Of course, Republicans should have good reason to oppose this extension.  The payroll taxes in question (FICA) are in place to supply the Social Security trust funds with revenue, and cutting these taxes without securing spending cuts drives a massive amount of debt, currently estimated at $120 billion annually.  But since the payroll tax holiday has been presented to Americans as a benefit to help the struggling poor and middle classes, fiscal responsibility doesn't matter -- Republicans would appear merciless to oppose it.  And Democrats have no reason to reinstitute the 2% that has been cut from payroll taxes in an election year, regardless of whether a new push for the "millionaire surtax" fails and the shortfall goes unfunded.

This reckless defunding of the trust funds has some advocates of Social Security frightened about the increasing prospect of reform.  According to Eric Kingson of Social Security Works, this political scenario is a witch's brew that "will result in the unraveling of Social Security."

He notes that "[i]t's very easy to enact tax-cuts.  It's very hard to get rid of them... If these tax cuts became permanent and if a future Congress chose not to reimburse the Social Security Trust Funds for the lost revenue, today's manageable shortfall would double, making it much less manageable."

Of course, this shortfall is currently about $6 trillion, so I suspect that Mr. Kingson applies a different meaning to the word "manageable" from what the rest of us are used to.  But it cannot be argued that the now-likely continuation of payroll tax cuts will make the problem "much less manageable."  This will increase the already mounting pressure on conservative lawmakers, he says, to make the system more cost-efficient, including spending cuts and the restructuring of benefit guidelines.

But perhaps the most significant implication of these payroll tax cuts becomes apparent as Kingson laments that the "payroll tax holiday will also promote Social Security privatization. Once people get the 2% in their pocket, they will be more susceptible to appeals that they should be able to put the funds into a private account."  Ironically, the figure for payroll tax cuts is tailor-made for the personal investment component of Paul Ryan's "Roadmap for America's Future."  In order to "allow a smooth transition," workers under this Republican plan will be allowed to divert from their payroll taxes "2 percent of their first $10,000 of annual payroll into personal accounts, and 1 percent of annual payroll above that to the Social Security earnings limit."

In an amusing departure from the common public perception, Ryan's plan to individualize Social Security savings would initially provide more revenue to the Trust Funds than Congress' now acceptable plan to legislate an unfunded payroll tax cut.  And since it's clear that Democrats, including our president, seem to believe that this 2% of payroll should be diverted from the Trust Funds so American families can invest in "pizza night," how could Republicans appear any less responsible for suggesting that those funds instead be diverted to invest in personal retirement accounts?

The payroll tax holiday, and the attention it is receiving, does indeed seem to offer Republicans a very realistic window to present Social Security reform.  It highlights the crushing liability of the current system and clearly exposes Washington's propensity to allocate the program's funds for political interests rather than its intended use. 

And Newt Gingrich (who, in this regard, has his finger firmly on the conservative pulse) seems to recognize the opportunity for reform in our current political landscape.  He has advocated the conservative platform of transferring the responsibility of retirement from government to individuals, voicing a desire to "offer voluntary private accounts as an opt-out of the Social Security system for younger workers."  But in an issue that should beget a semblance of unity among Republicans, GOP candidate Mitt Romney doesn't seem to agree, and Rick Santorum suddenly finds it an "irresponsible" idea -- so both are railing against Gingrich for the suggestion.

Santorum, who for fifteen years has been "in favor of personal savings accounts" for Social Security, said in a recent debate that if "95% of younger workers [choose to opt out], there will be hundreds of billions of dollars in increased debt."  Romney agreed in spades, saying, "Rick is right ... we simply can't say we're going to go out and borrow more money to let people set up new accounts that take money away from Social Security and Medicare today."

The question is, Mr. Romney, why not?  Congress is already taking money away from the trust funds for the political benefit of these ridiculous payroll tax cuts, ensuring hundreds of billions of dollars in increased public debt.  Furthermore, if we do not offer some sort of opt-out for future collectors of Social Security, how can future obligations to younger workers be more limited and manageable?

Paul Ryan's plan shows that the amount eligible to "opt out" can be gradually increasing, ensuring comparable revenue to the trust funds for current beneficiaries while simultaneously limiting future obligations.  And most importantly, it restricts the government's ability to engage in political gamesmanship that jeopardizes Americans' economic security in retirement.

Franklin Delano Roosevelt envisioned Social Security as a "contributory insurance program" (albeit mandated, and therefore recognized as unconstitutional even by its creators), where benefits were in direct proportion to contributions.  That is why, as a safeguard, he segregated Social Security contributions from the general taxation; he recognized that the former could be easily manipulated by politicians for specious or economic reasons.  That vision has been corrupted, and that barrier has been thoroughly destroyed over many decades of irresponsible government manipulation.

As Charles Krauthammer notes, cutting payroll taxes and willfully defunding Social Security is just the latest example that payroll taxes are "interchangeable with other revenues and never actually sequestered to ensure payment to retirees."  Most Americans have the good sense to keep their retirement accounts segregated from their other sources of revenue, setting those funds aside for the specific purpose of retirement.  This is a task that Washington has proven enormously unfit to perform for us.

So why are Mr. Santorum and Mr. Romney choosing to double down on Social Security's failures rather than pursue reform?  And by doing so, are they suggesting that an obviously corrupt, inefficient machine in Washington will see to Americans' collective security better than an individual can see to his own? 

We can only hope that if either candidate is nominated to represent conservatives in this year's election, he comes to better understand the unique opportunity that lies before us: that Social Security is finally ripe for reform, and the time to act is now.

William Sullivan blogs at and can be followed on Twitter.