Trojan Horseplay

For someone who frowns upon the homosexual lifestyle, Mr. Bush sure does like rear entries. First we had the back door draft, and now, in the form of Social Security reform, we have a back door tax cut for the wealthy.

Before I get to that, though, I wanted to summarize the mechanics of the new plan. I tried to simplify it as much as possible and put it in terms, as Shakespeare’s Sister requested, that wouldn’t require a financial background to understand. If you already have a grasp of the mechanics, feel free to skip down to the asterisked paragraph, which begins the discussion of how this is another back door tax cut for the wealthiest among us—an aspect of the plan that, in my opinion, hasn’t received the attention it deserves.

The Social Security “fix” that Bush is proposing is based upon the plan introduced to Congress by Sen. Lindsey Graham (R-SC). The Center on Budget and Policy Priorities has completed a detailed analysis of the plan that you can view here (thanks to Atrios). Here are the most salient points:

Currently the benefits paid by social security rise at the same annual rate as wages. Under the Graham Plan, payments would rise at the same annual rate as prices. Since prices rise at a considerably lower rate than wages, this represents a significant decrease in the benefits that would be paid by Social Security under the Graham Plan. If we were to leave Social Security exactly as it is, and do absolutely nothing, then it would be able to pay retirees larger benefits than it would under the proposed plan.

In order to help compensate for these lower benefits, the Graham Plan proposes the creation of “Voluntary Private Accounts,” into which each worker is allowed to divert some of their payroll taxes – up to a maximum of 4% of their total wages, or $1,300, whichever is lower. This money will be invested in a government-controlled portfolio of stocks and bonds that should hopefully give the retiree a higher rate of return on their savings than Social Security is capable of providing. Alternatively, workers can opt not to use these private accounts, and just receive the new lower, price indexed benefits.

Once they retire, those who chose to utilize the private accounts will essentially have Social Security benefits that are comprised of two parts: Part One: their government-issued benefit. Part Two: the proceeds of their private account. Sounds groovy, except that, and here’s where it gets nuts, Joe Schmoe, who opted to pay into a private account, will be subject to an additional cut to his government-issued benefit. This cut will equal the amount of money he would have earned had he invested the money directed to the private account at a 3% rate of interest. In other words, the net increase to his benefits will only be equal to what his “private” account manages to earn over and above 3%. If his account earns less than 3%, he will actually lose money on the deal.

I should make clear that the investments in the “private” account will be chosen and directed by the government. Joe will have no direct control over how these monies are invested. Many like Joe will find that the combined income they will receive from both that and their normal Social Security benefit will still be less than if we were to simply leave Social Security alone, and do absolutely nothing.

Okay, fair enough, maybe we can no longer afford the same level of benefits that we could in the past, but the Graham Plan does at least manage to put Social Security on a more even financial footing, right? Wrong. The payroll taxes that get diverted to the private accounts will put a 2 TRILLION dollar hole in Social Security’s finances, a sum that will have to be funded via debt.

* So why, for the love of God, is a plan that reduces the benefits that would be available if we left the current platform alone, and puts Social Security on a more uneven financial footing even being considered as a solution to our problems?

Well, under the Graham Plan, in addition to the payroll taxes that people divert to their private accounts, an additional $5,000 per year may be contributed to what effectively amounts to a ROTH IRA. Contributions to a ROTH are not tax deductible, but all capital gains and interest earned within them are tax-free. Once retirement age is reached, withdrawals are also tax-free. For the lower and middle classes this is completely meaningless, as we can already contribute as much $4,000 per year to a ROTH IRA, and for most lower and middle income families, even this sum is more than they can afford; only 4% of people eligible to make an IRA contribution actually put in the full amount.

For the wealthy, however, this is great news, as it allows them to put an extra $5,000 a year in tax favorable accounts, effectively handing them a very nice tax cut. This tax cut will put the nation’s finances in even more dire straights, further destabilizing Social Security, and possibly even reducing the benefits of retirees who are not able to afford a $5,000 IRA contribution!

It should be noted that for those who earn less than $27,500 a year, the Graham Plan will match their contributions to this extra IRA account dollar for dollar. However, as noted above, matching or no, it is very difficult for most low and middle class families to put much aside in IRAs.

So there you have it: a massive increase in federal debt, lower benefits for those rely most on Social Security benefits for their retirement, and a nice tax cut for the wealthy—the Bush Plan in a nutshell. Not to mention more fees for his corporate donors on Wall Street.

This, the flagship legislation of Bush’s second term is all about dismantling the social contract that has nobly served the interests of the average American for a half century, and giving kickbacks and breaks to the people that need it the least. The mendacity with which this legislation is being presented to the American people is a disgrace, and proves once again that all this administration cares about is catering to the wealthy and the corporate lobbyists who grease their palms. The rest if us are nothing but a commodity, to be bought and sold at the lowest price possible; expendable, powerless, and worthy only of their contempt. This plan is an insult to every American, and if it is passed then we have become deserving of their contempt.

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