Wednesday, March 09, 2005

Senate Dems Breaking Ranks on SS Reform?

Tony Blankley has an interesting column that some senatorial Democrats are having second thoughts with total obstructionism. Link. He uses a football analogy to describe the strategy of the two sides.
President Bush plays politics the way my friends and I used to play pick-up football when I was a kid. In the huddle, the quarterback would tell everyone else to go out long. On the snap the quarterback would dance around in the backfield until one of us five or six receivers got open, at which point he would complete the pass. With both sides going long all the time, we often ended up with basketball scores.

The Democrats, on the other hand, when on offense, merely receive the snap and fall on the ball. When on defense, they put all their men on the line -- trying for a quick sack of the quarterback. If the quarterback is too agile for them, they are vulnerable to be scored upon -- given their lack of a pass defense.

When two such teams meet, the best score the all-defense Democrats can hope for is a 0 to 0 tie. The best score the all-offense Republicans can expect is at least a 56-0 win.

He then gets specific about some Democrats breaking ranks with respect to Social Security reform.
But because the Democratic leadership is intent on denying President Bush a "victory" on Social Security, they are whipping their members to not negotiate with the president or congressional Republicans. Thus, a few weeks ago, Senate Minority Leader Harry Reid announced that his fellow Democratic senators were completely united in refusing to deal on the issue.

Even when he said it, it wasn't true. Between a half dozen and a dozen Democratic senators have been meeting and talking seriously about Social Security legislation in three more or less separate, but related conversations with Republican Senators Charles Grassley, Lindsey Graham and Chuck Hagel for several weeks. Keep in mind, Republicans only have to pick up five Democrats to pass Social Security over a filibuster effort in the Senate.

At first glance, it appears that there is no middle ground.. How do you split the difference between “in the system” and “outside of the system”? We believe we have a plan that does just that.

Both sides describe their plans as like 401(k) plans, but neither is. In a typical 401(k) plan, an employee puts a percentage of his gross income into the plan for retirement investment, and his employer matches either 50% or 100%. Let us assume an employee chooses to defer 2% of his gross income and his employer matches 100%. For every $1000 he earns, he will put $20 away for investment, and the employer will put in $20. His contribution is tax deductible, so his taxable income is now $980. If his combined federal and state tax is 30%, his income taxes are reduced by $6, from $300 to $294. Thus, for a net cost to his take-home pay of $14, he has saved $40 for retirement. It is no wonder that 401(k) plans are so popular with employees.

Under the current Social Security system, the employee also is paying a tax of $62 and his employer is paying $62, or a total of $124, into the system, to be paid out to current retirees. He owes income tax of $300 on taxable income of $1,000.

Under the President’s proposal, $40 of his payroll tax can be put in a private account for retirement savings. At no cost to the employee, he is saving $40, and the pool available to distribute to current retirees has been reduced from $124 to $84, a 32.3% reduction. His income tax is unchanged at $300.

Under the Democrat’s proposal, the employee can save the $40 in addition to his $62 and his employer’s $62 into the Social Security pool. Assuming this $40 is deductible for income taxes, his taxable income is reduced to $960 and his tax is reduced to $288, a $12 saving. For a net cost to his take-home pay of $28 ($40 - $12) he had saved $40 for retirement.

Suppose we make it truly like a 401(k) plan. The employee can choose to save a tax-deductible $20 into his personal account, after paying $62 in payroll taxes. The employer matches it with $20, which is deducted from the $62 he owes to the Social Security pool. (The match could also come from the employee’s portion, but this way it more closely mimics the employer match of a 401(k).) At a net cost to his take-home pay of $14, the employee is saving $40, just like in a 401(k) plan. The pool available to distribute to current retirees has been reduced from $124 to $104, a 16.1% reduction.

The compromise plan reduces the Social Security’s “transition cost” by 50% ($20 vs. $40), with the employee covering 35% of the amount invested in his personal account. For every $14 he contributes, $40 will go into his personally owned account, to grow tax free and be there for him when he retires, and to leave the remainder to his children when he dies. This is the same math as with a 401(k) plan, and it should be very popular, even if the cost is not zero.


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