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The Kilgore Switch

The first phase of the Social Security war is over, and we all nervously await the next move. Everyone in the journalism/blog community seems to think it will involve a move to create private accounts that are add-ons to Social Security, but that would be structured so that over time people could put part of their payroll taxes into the accounts. As Josh Marshall has said, this is nothing more than slow, modified Social Security phase-out.

But a lot of other people I've talked to in the last couple days, in Democratic circles in particular, think the next move is not necessarily toward some modified version of Social Security phase-out, but toward totally freestanding private accounts that shelter savings tax-free. This might be called the Kilgore Switch, as it was Ed Kilgore who first predicted the switch from Social Security to tax policy in this way, writing on January 18:

You have to wonder if the purpose, if only the fallback purpose, of the Bush SocSec campaign is to suddenly shift the debate from personal retirement savings accounts financed by payroll taxes to personal general savings accounts stuffed with sheltered upper-crust investment income. If there's any chance of that, Democrats needs to start preparing for it.

I think that the Kilgore Switch is more likely than some alternative that still threatens Social Security. We're being to literal if we think that the only thing they want to do is gut Social Security. The reaction to Social Security private accounts has been so strong, and totally unrelated to the details, that just changing the accounts by delaying the time when they take revenue out of Social Security is not likely to seem different enough. Most likely, the president will push push push on Social Security, and then turn on a dime, announce that it's really all about Retirement and Ownership, not just Social Security, and propose new savings vehicles totally outside of Social Security. This could take the form of the lifetime savings accounts that were supposed to be proposed in the 2004 State of the Union but were taken out at the last minute.

This will pose a much more difficult dilemma for Democrats, and it will be much harder to persuade them not to enter negotiations on this. There are ways that such accounts could be wonderful, true opportunities to build both security and ownership for those who need it most -- for example, a universal 401(k) that either the individual or employer could contribute up to $2,000 a year to, with contributions pre-tax and with a matching system to encourage low-income people who can save a little, paid for by repealing Bush tax cuts for the rich.

And at the same time, there is a way that such accounts could be awful, which is what Bush was toying with last year: Lift the limits on how much you can contribute to existing accounts, or create new accounts that allow people to save unlimited amounts in which the gains accumulate tax-free and are not taxed on withdrawal.

This doesn't benefit anyone who isn't already saving sizable amounts, and it is nothing more than a vehicle for further pulling most investment income out of the tax base entirely, putting more of the burden on work. It is even more dangerous than changing the tax treatment of dividends or capital gains, because those policies can be changed, but once money is put in a tax-free account, the income it generates can never be returned to the tax base.

But in the zone between these extremes, is there a bright line between accounts that liberals might find acceptable and those they should reject entirely? I'm not sure. It was pretty easy for Democrats to say that they would oppose anything that threatened or changed Social Security's guaranteed benefit structure. This won't be as easy, and it will be unlikely that Democrats will have a unified view, on substance, of where the line should be.

And even if they do find the line, this will be one of those things that Bush/DeLay will get passed in the Senate in a version acceptable to Democrats, then rewrite it in conference to make it much, much worse, then dare Democrats to filibuster a conference report on something they all said they were for, that doesn't touch Social Security, etc.

This is where the argument that you can't negotiate with people who have proven they negotiate in bad faith should be persuasive. (I think the next time Bush utters his favorite line, "I won't negotiate with myself," someone should say, "I don't blame you -- I wouldn't negotiate with you either.")

But it is still a lot to ask people who were elected to produce legislation, who are expected to compromise, and who love policy, to sit on their hands and do nothing but oppose, oppose, oppose. As gratifying as the success has been in defending Social Security in this first phase, the second phase is much scarier.

Posted by Mark Schmitt on March 4, 2005 | Permalink

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Comments

Yes, you are right.

General private accounts will probably be recommended by the tax overhaul commission Bush appointed. This is part of his plan to transfer taxes from the rich with their investments to the poor who work for a living.

Democrats need to gear up to fight this development tooth and nail. I think we can do just as well with this as we have done (so far) with Social Security. Make clear how rich people will gain and poor and middle class will suffer.

Posted by: Paul Siegel | Mar 4, 2005 3:06:02 PM

What about two bright lines: any tax reform must be revenue neutral, and must reduce the total tax burden on the bottom 90% of family incomes.

That message is credible since it's consistent w/ what we've been preaching right along; it would be broadly popular, and even by talking about those issues we're keeping the discussion focused on what people like the least about GOP tax policies; and the combination of those two factors would force any solution toward the "best case" outcome you describe. The key would be keeping the focus on that "total tax burden", and not letting the GOP talk about the regular income tax (exclusive of payroll & cap gains taxes) as if they're different animals.

Posted by: Tom | Mar 4, 2005 3:06:52 PM

Mark, remember the chinese word for crisis...er, sorry. This is an opportunity to draw this out, but it is frightening. In my opinion Tom's two bright lines above are on the money. I would actually make it a rallying point that any proposal not only be revenue neutral, but that it be revenue neutral with regard to the last time we had a balanced budget, and make Bush find a way to pay for all of his new spending, while also following the other bright line of keeping the tax burden the same or lower on the bottom 90%.
Bush has seriously screwed up the nationas financial picture. If he wants to propose ambitious reforms then he should at least be required to fix the problems he has caused since he got here, and the Democrats should be highlighting the Bush failures.

Posted by: theCoach | Mar 4, 2005 3:15:46 PM

agree with Tom as well. What about the deficit? Also, what about things (uninsured) which are even higher priority than boosting savings/wealth creation?

Posted by: roublen vesseau | Mar 4, 2005 3:41:21 PM

Isn't the tactical solution here to pre-emptively counter-propose a Moynihanish 'on-top-of-ss' savings account so that Democracts can strongly object to the Republican plan without being 'obstructionists'? If the story is about competing bill's, then the debate is about those contrasts, so the silly rhetoric about 'ownership' can be opposed without being anti-'ownership'.

Posted by: pantomimeHorse | Mar 4, 2005 5:15:35 PM

(I think the next time Bush utters his favorite line, "I won't negotiate with myself," someone should say, "I don't blame you -- I wouldn't negotiate with you either.")

Hah! That's fantastic.

Posted by: JP | Mar 4, 2005 5:58:34 PM

Isn't the tactical solution here to pre-emptively counter-propose a Moynihanish 'on-top-of-ss' savings account so that Democracts can strongly object to the Republican plan without being 'obstructionists'?

I totally agree, and Tom's suggestions above form a clear basis for such a proposal.

The Democrats have basically won the first round of the Social Security fight, and part of what this means is that they need to go on the offensive. Not by attacking the Bush Administration, but by stealing their thunder. They have a window of opportunity to take the initiative. It won't be open long.

Posted by: Tom Strong | Mar 4, 2005 7:47:23 PM

paid for by repealing Bush tax cuts for the rich.

Rarely are we able to identify so clearly the point at which a scenario moves into fantasy.

Posted by: Nell Lancaster | Mar 4, 2005 9:35:34 PM

paid for by repealing Bush tax cuts for the rich.

Rarely are we able to identify so clearly the point at which a scenario moves into fantasy.

Well, that's kind of the point, isn't it? Anything the Democrats actually WANT isn't going to get passed, so instead of trying to compromise and negotiate with people who have shown they have no intention of negotiating in good faith, come up with an alternative proposal that Bush etc won't be able to swallow, and make sure it's clear who's blocking it and why they've made it impossible. Make Bush and the Republicans take responsibility for their crashing the government's balance, and link it to being the reason that something can't be done. And then the Republicans are the one fighting to protect tax giveaways to the rich and blocking saving and retirement accounts for average people.

Posted by: Nate | Mar 5, 2005 2:56:57 PM

I was feeling kind of upbeat about the post SS-battle political landscape...

Posted by: rilkefan | Mar 6, 2005 12:23:25 AM

One bright line I see is, that withdrawals above a certain amount ought to be taxed.

It's really a matter of tax shifting; if you tax is before it goes in, it's an income tax. If you tax it after it comes out, it's a consumption tax. If you don't tax it, it's a blueprint for aristocracy.

Posted by: Jim D | Mar 8, 2005 4:45:32 AM

Let them expand retirement accounts. We know that Bush is going to run deficits no matter what. When the good guys are back in power, I would rather tax consumption than earning (progressively, of course). See Robert H. Frank.

Posted by: c. | May 3, 2005 1:29:52 AM