In the State of the Union Address in January, President Clinton had the crowd roaring with his proclamations of good fortune throughout the land. They cheered and bounced with joy at the words "balanced budget." They were over the moon when he hinted at a surplus.
Then, when Clinton promised the extra cash to save Social Security first, this audience of our nation's most dignified looked ready to leap into each other's arms and dance a jig.
Now that everyone has sobered up, Congress is getting ready to take a serious look at Social Security and its problems. The Social Security system is a so-called "pay-as-you-go" program in which the current generation of workers finances the current generation of retirees. The money goes in one ear and out the other, so to speak, with precious little governmental gray matter in between to stop it.
The pay-as-you-go system works fine, as long as there are both a constant number of retirees and a constant number of people paying taxes to finance these retirements. Today, there are three workers to support each Social Security recipient. However, by 2035, that burden will be shared by only two. Severe benefit cuts and a payroll tax hike of six percentage points have been projected. Clinton's surplus will not be enough to save the system.
Economists Laurence Kotlikoff and Jeffrey Sachs have proposed an alternative that is gaining support in Congress. They recommend that the federal government use Social Security taxes to build individual retirement accounts for each worker. Whether invested in securities or equities, these Personal Savings Accounts could offer a higher rate of return than the Social Security's current 2.3 percent. Once fully privatized, the Social Security system would be insulated from any future demographic crises.
Before we all start dancing, though, one pesky detail remains: How to pay the Social Security benefits promised to those already retired and those who will soon retire? Messieurs Kotlikoff and Sachs suggest a 10 percent sales tax, which would decline to a permanent level of two percent by 2040.
A sales tax, fellas? How unimaginative. Taxes are powerful policy instruments that can do a lot of good. For instance, we put taxes on cigarettes to discourage smoking. What good would a sales tax do? Discourage buying?
If we are talking about raising taxes, let's do it right. This engineer's heart has bled for too long over the low price of energy in the United States. Compared to Europe's hefty tax on gasoline, ours is wimpy. The revenue generated doesn't even cover repairing the roads, which is the stated purpose of the tax.
Driving is more expensive than that, even. The hidden costs include everything from national defense to parking, from traffic accidents to environmental and noise pollution. These costs are paid through other taxes, higher prices for goods and services, or diminished quality of life. At just over a buck, the price of a gallon of gasoline does not give drivers correct information about the price they are paying for the privilege of burning it.
According to my rough calculations, raising the gas tax by $2.50 per gallon would generate the same revenue per year for Social Security as would the sales tax proposed by our friends Kotlikoff and Sachs. This tax would bring our gasoline prices in line with those of the chic Europeans.
Hopefully, the higher price of gasoline would encourage drivers in the U.S. to burn less of it – by driving fewer miles, buying fuel-efficient vehicles and using clean-burning fuels that would not be heavily taxed. Tax revenues will decrease over time, just as the privatized Social Security system begins to take over.
Any drawbacks? Washington worriers are scared that the gas tax would depress the economy and that more small cars on the road would increase traffic fatalities. These fears are unfounded. Because of the gas tax, Europeans do a fraction of the driving that Americans do for noneconomic purposes, but they make nearly as many trips to work and for other economic purposes. Also, collisions between small cars are no more dangerous than those between large cars. Small cars are only dangerous in crashes involving larger, heavier vehicles. The gas tax would actually improve highway safety by helping to remove large cars from the road.
Unfortunately, the gas tax would disproportionately affect the poor and those living in rural areas. However, as the benefits of reduced driving reduce government spending, income taxes could be cut. The tax breaks could be designed to benefit these groups disproportionately as well.
Besides saving Social Security, the gas tax would give all Americans more choice to control the costs we pay.