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Moynihan's Social Security Plan

By James K. Glassman
Tuesday, March 24, 1998; Page A19

The president is in Africa, the Republican Congress is AWOL, but at least one politician has been working. Sen. Daniel Patrick Moynihan (D-N.Y.) last week announced a plan to change Social Security for the better by cutting the payroll tax and letting Americans use the money for private retirement accounts – or for whatever else they want.

It is a courageous idea and a powerful combination – lower taxes for overburdened workers plus more personal choice and responsibility.

Moynihan's credentials as a liberal social reformer can't be questioned. So when he advocates privatizing even a portion of Social Security, it's big news. It's also why his idea is panicking advocates of the status quo.

Henry Aaron of the Brookings Institution, for instance, blasted the Moynihan plan as "the My Lai approach to Social Security reform – burn the system down in our attempt to save it."

My Lai, of course, was the site of a vicious massacre of civilians by U.S. troops during the Vietnam War. In his office late on a rainy Friday, Moynihan is reading aloud Aaron's quote, which appeared on the front page of the Wall Street Journal. He shakes his head, appalled by the comparison, but holds his temper.

"My Lai?" he says to me, incredulously. "Did we shoot anybody? That's the language," he says, of " `don't change a thing.' "

Something must change, Moynihan is convinced. The "veto groups," as he calls them, cannot prevail. Young people, especially, have lost faith. They wonder why they can't take care of their own retirements with stock and bond investments, rather than trusting a system that either is headed either for bankruptcy or will provide paltry or even negative returns on their contributions.

"The energy in social policy right now is to privatize," Moynihan says. "Any effort to keep Social Security will have to acknowledge the people who want to get rid of it, the people who are saying that government is taking your money and cheating you."

The senator from New York – former labor economist to President Kennedy, Harvard professor, ambassador to India and the United Nations, author of 17 books, ranking member of the Finance Committee – wants to alter the Social Security system profoundly. It is no longer enough to fiddle around the edges.

In his speech March 16 at Harvard, Moynihan described the process in 1983 that led to saving the system, temporarily, by boosting taxes:

"Had we, indeed, just barely escaped bankruptcy? What then did the future hold but more such crises? In the meanwhile, the academic world had changed. Energetic and innovative minds – one thinks of Martin Feldstein here at Harvard – had turned away from government programs – the `nanny state' – toward individual enterprise. As the 1990s arrived, and the long stock market boom, the call for privatization of Social Security all but drowned out the more traditional views. This was for real."

Specifically, Moynihan would:

Cut the payroll tax from 12.4 percent (half paid by employer and employee) to 10.4 percent – a reduction of $800 billion in taxes over 10 years. "There is a matter of fairness here," he said at Harvard. "Of families that have payroll tax liability, 80 percent pay more payroll taxes than income taxes."

Keep benefits the same, except for cutting one percentage point off the annual adjustment in the consumer price index, which, 15 studies confirm, overstates inflation. Moynihan would also hike the retirement age slightly, raise the cap for earnings subject to the payroll tax and tax benefits the way that private pensions are taxed.

Allow voluntary tax-deferred personal retirement accounts, which each American could finance from the 2 percent tax cut. Through the magic of compounding, a $30,000-a-year worker, putting just 2 percent of pay into an account that earns a modest after-inflation return of 4 percent, would accumulate $350,000 over 45 years.

Put Social Security on a pay-as-you-go basis. In 1997, for example, the government took in $446 billion in Social Security taxes and paid out only $365 billion in benefits. The extra $81 billion went into a trust fund (valued at about $631 billion) and was lent out to finance other federal programs. Moynihan has long wanted to end this nonsense. We're extracting tax dollars from those who can least afford it – and from everyone who might have better uses for it. Paring back, or even abolishing, the payroll tax is an idea that liberals, social conservatives and libertarians can love.

No, Moynihan's plan does not go far enough for my taste. We should be able to opt for completely private accounts, like Chileans have had for 16 years. But this is a gutsy proposal that moves in precisely the right direction. It would establish a structure that could easily accommodate further privatization.

For example, why not use the federal surplus, projected at $841 billion over the next 10 years even with Moynihan's changes, to cut another few points off the payroll tax? Reductions in federal spending could reduce it further – and, again, expand private retirement accounts.

Unfortunately, nervous Republican leaders want to put Social Security reform on the back burner, waiting until after the 1998 and 2000 elections. But that could change. "There's a growing consensus," Sen. Phil Gramm (R-Tex.) told me, "that we have to do something about Social Security. . . . The surplus gives us a vehicle." And now so does Daniel Patrick Moynihan.

The writer is a fellow at the American Enterprise Institute.

© Copyright 1998 The Washington Post Company

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