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Gore's Plan on Social Security Passes the Buck

October 03, 2000|JOHN B. TAYLOR | John B. Taylor teaches economics at Stanford University and is an economic advisor to the George W. Bush campaign

Jay Leno used to joke this summer that he saw Al Gore "in Kinko's copying George W. Bush's Social Security plan." It's not surprising that the vice president is trying to copy the Bush plan.

According to polls, people like the Bush plan, which allows them to place a percentage of payroll taxes into personal retirement accounts. Gore's claim that personal accounts are "a risky scheme" wasn't credible, because so many people have benefited from safe and sound investments and because a principle of the Bush plan is that no current retiree and no one near retirement will have a change in benefits.

Unfortunately, Gore's copy of the Bush Social Security plan is not a very good one. The Gore copy, called "retirement savings plus," would transfer federal money--taxpayer dollars--into 401k-type accounts. A married couple earning between $30,000 and $60,000 would get a government check to put into their account equal to the amount they put into their account; a couple earning less than $30,000 would get three times as much; a couple earning between $60,000 and $100,000 would get one-third as much. For single parents the income ranges are 75% of these.

But these accounts have nothing to do with Social Security. Adding the "plus" label may convey a different impression, but a "warning" label that "this new entitlement program is of no help to Social Security" would be more appropriate.

In contrast, the Bush personal accounts are an integral part of Social Security. The personal accounts strengthen Social Security because people would earn higher returns in the accounts than the current system. This higher return is why personal accounts are part of any credible plan to save Social Security.

Although the vice president's plan is touted as helping low-income working people, it is likely to have little positive effect on them. Consider a young single mother with one child. If she is earning just enough to get by, then she will not be able to save anything. She will get nothing from the Gore plan. In contrast, under the Bush plan (including a higher child tax credit and lower income tax rate) she benefits. For example, if she earns $20,000 a year, she will get an extra $725 a year and still put a percentage of her payroll taxes in her personal account. If the percentage is 2% of income, she could deposit $400 each year, accumulating an inflation-adjusted $100,000 at retirement.

There are also disincentives in the Gore plan. Suppose that this single mother does save $500. Then she gets another $1,500. Now, suppose she does a good job and gets a raise, say to $24,000, taking her beyond the $22,500 threshold; then she gets $1,000 less from the government (her $500 is matched by $500, not $1,500). The $1,000 loss is a disincentive to try to increase one's income. In contrast, the Bush plan reduces disincentives. In this example, the tax rate would decrease by 15% with the Bush plan.

If the Gore 401k accounts have nothing to do with Social Security, then how can the vice president say that he would extend the life of Social Security? It's tricky: Gore would create extra federal government bonds that he would give to the Social Security trust fund. These bonds could be presented for payment to the federal government when Social Security funds run out in 2037.

But the only way the government can pay off the bonds is to raise taxes, cut spending or borrow. The Gore bonds are like a time capsule with a message to the next generation: "You find the resources to work out the Social Security problem. You cut spending on education, you increase income taxes--or be like us and pass on the mess to your children."

These "you-fix-it" bonds do not extend the life of Social Security; they simply pass responsibility for extending its life to our children. America needs the original Bush plan, which strengthens Social Security, not such a poor copy.

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