Gingrich’s flawed Social Security and income tax proposals

With Newt Gingrich vying for front-runner status in the Republican presidential primaries, his positions on important public policies such as Social Security and income taxes deserve scrutiny. In both cases, Gingrich adopts familiar Republican concepts — but then undermines their key objectives.

Gingrich’s “fix” for Social Security builds on a Bush-era proposal. He would allow younger workers to contribute a portion of their payroll taxes to a private account instead of to the Social Security fund. These accounts could be invested in one or more diversified mutual funds in a plan regulated by the federal government.

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But Gingrich takes a radical step further by effectively telling those workers not to worry if their investments of payroll taxes do poorly. According to Gingrich, “The Treasury will send them a check to make up the difference” between their fund returns and their scheduled benefits under Social Security.

By guaranteeing the government’s scheduled benefits as the floor, Gingrich gives workers a tremendous incentive to roll the dice. After all, if their investments do well, the workers will receive higher retirement payments. If their investments crater, the workers still get the guaranteed benefits from the Treasury. Heads you win, tails (we) taxpayers lose.

Gingrich argues that holders of private retirement accounts could not assume much risk because they would be allowed to invest in only a few diversified funds, such as those offered by the 401(k)-type plan for federal employees. Gingrich is right that this plan would prevent workers from buying stocks in individual companies such as Google or from investing in the latest social-networking initial public offering. Under that civil service plan, however, individuals can invest in international stock funds or small company stock funds — diversified funds with considerable downside risk.

Moreover, Gingrich’s plan explicitly allows workers to quickly switch between funds. Such switching would increase the risks of these investments if workers attempted to time the market. Although market timing is usually not a successful strategy for unsophisticated investors, these workers would not worry about guessing wrong. They would, under Gingrich’s proposal, still receive the guaranteed schedule of Social Security benefits from the Treasury.

Similarly on income tax reform, Gingrich picks up the Republican idea of a flat tax for individual income — and perverts its basic principles. Under the core concept of a flat tax, individuals would pay only one tax rate, which could be quite low because there would be few, if any, tax deductions or tax credits.

Gingrich has proposed a flat tax for individuals with a 15 percent rate after an exemption for the initial $12,500 of income. But Gingrich’s plan does not follow through on the elimination of tax deductions and credits. Of the current major deductions, he eliminates only the deduction for state and local taxes. Gingrich also retains many expensive credits, such as the child tax credit and the earned-income tax credit.