US Politics Special: The Conservative Way Forward on Social Security

Last week's quiet in Congress was broken when the House of Representatives debated the spending levels to keep the government in operation through 30 September, the end of the current Fiscal Year.On Tuesday, Wednesday and Thursday the House did not adjourn until past midnight. Members can presumably catch up on sleep this week when Congress is in recess for President's Day.

Meanwhile, President Obama released his budget for Fiscal Year 2012, which starts on 1 October.Some sympathetic commentators, i.e., those who didn't castigate the President for cowardice or a lack of statesmanship, argued that this was a credible political strategy. Ignore the subject of this year's budget and let the Republicans raise it; with the consequence they become labelled as the party that wants to tear apart America's welfare system. That is not a badge you want to wear as you enter a 2012 election campaign that, as always, will be decided by moderate Independents.

Entitlement reform will be the political battleground for the foreseeable future. The current struggles over cutting government spending are only the initial skirmishes in a long campaign ahead. Momentum is growing for the budget summit called for two week ago by Sen. Kent Conrad (D-North Dakota), Chairman of the Senate Budget Committee, and Republicans are intimating their leadership will only attend if entitlement reform is on the agenda for discussion.

That brings up to a final look at the Conservative Roadmap put forward by Rep. Paul Ryan's (R-Wisconson), with its recommendations for Social Security and Tax Reform. His ideas are not the official policy of the GOP, but they set out the standard conservative position and some variant of the proposals will be on the table if and when the budget summit convenes.

Ryan contends on Social Security, as with other social programmes, that individuals are best suited to make the choices that benefit them. Instead of paying into a general fund, individuals will create a personal account that they manage, with the aid of government-appointed experts, to provide an annuity or pension when they decide to finish working.

Ryan's system works along the lines of the established private 401(k) retirement plans, but it is modelled on the example of the Thrift Savings Plan, the fund that helps manage the retirement incomes of individual employees of the Federal Government's civil service and armed forces. The irony? Alongside . Ryan's approval of the Federal Employee Health Program in his plan for changing health care provision, this is an implicit endorsement of the way "Big Government" looks after its employees.

Historically, Social Security has not contributed to government deficits. Payments to recipients have been more than covered by receipts from the workforce in payroll taxes. But this changed for the first time last year. Even if that was an event that could be blamed on the impact of the recession –-- less workers, less taxes; more workers deciding to retire early so more payments –-- experts are predicting the shortfall will be an annual occurrence by 2015 at the latest.

It is dawning, even among stalwart progressive defenders of Social Security, that it is better to introduce changes now that secures the future of the fund than to await uncertain economic developments in the years ahead. Social Security may be fully funded through 2037, but after that drastic cuts will be needed on an immediate basis. An aging population cannot be financed in the long term by fewer workers paying taxes.

Hence Ryan's proposal that individuals create personal accounts instead of paying into the general fund through their FICA taxes. It is a long-term plan, beginning after a couple of years notice, with those already working having the option to stay in the current system or switching to the Roadmap option, and with no changes at all for those under 55. There are gradual phase-in points along the way, but the overall idea is that after 30 years the personal account plan will replace Social Security

The personal account is modelled after the Federal Government's Thrift Savings Plan by giving individual's a three-tier structure of investment options. Tier One invests the individual's money in rock-solid instruments. Once a certain amount of funds is invested, then Tier Two money is enrolled in a portfolio of bonds and equities managed by the government. After enough funds accumulate in Tier Two, individuals can then choose to put their money into options provided by non-government firms. These companies must be certified as sound worthy by a newly-created Social Security Personal Savings Account Board.

This Board will administer and regulate the Savings Fund into which all the personal accounts will be paid. It would consist of five members, all with expertise in financial management, who would be appointed by the President. Surprisingly, Ryan cedes this selection power to the Executive Branch, with the proviso that two nominees be appointed after considering the recommendations of the House and Senate.

The Board will play a crucial role in the effectiveness of Rep. Ryan's system because every dollar paid into a personal account is guaranteed as redeemable, including annual inflation adjustments, upon retirement. Whatever the stock market's condition upon retirement, and an individual's investment in the market though Tier Three plans, they will be given a sum to buy an annuity at least equal to the money placed in the personal account.. This gives the Board, government appointed and approved, an enormous stake in financial markets.

Ryan's plans for Social Security are that it protects low-income payees by ensuring that they receive an annuity payment at least 150% of the poverty level. The personal account is the private property of the individual, so that if he/she dies before retirement, the investment is passed to heirs.

The upshot of Rep. Ryan's proposals for Social Security (and Medicare and Medicaid) is that the government is still heavily involved with the programs. He does not advocate they be privatised, and with the guarantees in all three, especially for low-income families, the Federal Government will still be spending huge sums on entitlements, just not as much as now.

Central to Ryan's ecommendations are that government revenue from business and individual taxes can never exceed 19% of total GDP. Government will have a set amount of income each year, and funding of entitlement programs will have to change according to that limit, and not the other way around. If spending is scheduled to surpass income then government spending must be cut instead of raising taxes. This provision is protected by requiring, except in cases of national economic or military emergency, a 60% majority vote in both the House and Senate to change the 19% limit.

As for the taxes themselves, Ryan joins many others, including the President, in calling for a Simplified Income Tax. The specific recommendation is that all current deductions would be eliminated and replaced with one standard exemption applicable to everyone. A family of four would receive an exemption of $39,000, after which they would pay 10% on income up to $100,000, and 25% on incomes above that. Intriguingly, taxpayers are allowed to stay within the current system if they prefer.

Much more interesting are Rep. Ryan's proposals for changes in business taxes. President Obama opined in his State of the Union Address that the US needed to out-compete the rest of the world, and called for greater government investment in certain technologies to help reach that target. Conservatives maintain that the problem with America's global competitiveness is the crippling corporate tax that stops companies investing in those technologies themselves.

So Rep. Ryan proposes eliminating the corporate income tax and replacing it with a Business Consumption Tax. Under this system all businesses pay an 8.5% tax on goods and services, where they have added value to those products. At its simplest, say a furniture manufacturer buys some wood for $100, and sells it as a chair at $200, they would pay 8.5% on the $100 value they have added.

At heart the BCT is intended to free up the investment incentive for private companies. Businesses calculate their payment to the government by adding up total sales for a year, minus total purchases from other companies, and then taking out their investment expenses. The sum left over after that deduction is what the government actually receives in revenue. To stimulate America's global competitiveness, the BCT is lifted on exports but would be imposed on all imports.

There has been a noticeable escalation in media coverage of Rep. Ryan's Roadmap. However, it still lags far behind references the President's deficit-reduction commission report from last November. That will be the next order of business when we return to ideas for reform of federal entitlement spending.

Our next task, however, is a look at Wisconsin and some of the extraordinary scenes taking place in the spiritual home of progressivism.

For what is at stake there is the issue of spending on health care provision and retirement plans for state employees, a problem that faces nearly every state in the US. Some progressives are comparing the rights for workers struggle in Wisconsin to the issues that galvanised the uprisings in Egypt and elsewhere. I'm not sure if that is a credible comparison, but it is certain that what is happening in Wisconsin will spread to other states in the near-future.