Uncivil Rights

This is from the WSJ:

Don't Let Fiscal Phantoms Stop Reform
November 17, 2004; Page A17

While Democrats and the media distract themselves over an anomalous polling question concerning "moral values," it turns out the election was about economics, specifically entitlement and tax reform, stupid.
Thank goodness, for these are real problems susceptible to discussion and consensus about what constitutes good policy. This column has long maintained, for instance, that when all else fails in trying to cope with our health-care mess, reformers will have no choice but to hit upon the real solution: tax reform.
Ditto the problems with Social Security and Medicare. The way out of these thickets is via a fundamental overhaul of the tax system, too.
From this perspective, it's only a matter of tactics whether tax reform is the thin wedge the administration uses to reform entitlements or the other way around. We eagerly await the polling and focus-group metrics that will determine the most politically promising approach. For tidiness’ sake, our preference would be to start with tax reform.
Details can be conjured up later, but the basic architecture would be elimination of the income tax -- "income" being a too vague and loophole-ready concept -- in favor of some kind of consumption tax. Thus any money put aside for future consumption -- aka savings -- would remain untaxed until it's consumed.
Presto, this would eliminate the perverse double taxation of saved income now rife in the system. The natural incentive would be restored to encourage people to save for future consumption, say, for retirement or old-age medical expenses.
This being done, it would be a relatively simple matter of getting out of the working-age population's way with a Social Security and Medicare payroll tax opt-out. Let workers have a choice of whether to remain in the existing federal retirement programs (with all the risk of future benefit cuts) or take ownership of their payroll taxes in the form of private investment accounts.
OK, any reform involving two Big Bangs, rather than merely one, faces the likelihood that an election will intervene, empowering the forces of reform fatigue. So the other possible approach is to let entitlement reform effectively achieve tax reform.
Last year's Medicare bill, which authorized Health Savings Accounts for the masses, is already testing the Fabian approach to reforming the massive middle-class entitlement known as the tax deductibility of employer-provided insurance. Workers and employers alike are just beginning to notice the opportunity here, changing the incentives to over consume and misallocate health care, and creating gains that the worker and employer can share.
If it all works out, employer-provided, gold-plated insurance that is now the rule -- with all its inbuilt incentives for medical inflation -- will become obsolete. From there it would be no biggie to throw Medicare payroll taxes into the pot and let private solutions be extended past age 65.
What HSAs are doing for medical spending and savings, Social Security reform would do for retirement savings.
Option Two produced by the president's 2001 Commission to Strengthen Social Security seems to be the favorite, allowing workers to direct one-third of payroll deductions into a private account up to an annual limit of $1,000. Workers in return would give up a commensurate share of their future federal benefits.
But why any limit at all? Here's where the screaming about the deficit begins, with Democrats insisting essentially that Social Security is unreformable because so-called transition costs would "explode" the deficit. This is a council of despair if not suicide, not to mention a basic misunderstanding: Fiscally, reform is not only doable but mandatory; only the politics are needlessly difficult.
Deficits create additions to the national debt, and are a problem only to the extent that we can't pay back the debt without hardship, because we spent the borrowed money unwisely. Problem One is that we fib to ourselves about the true dimensions of the debt because we count promises made to bondholders (current value $3.9 trillion) but not promises made to future retirees ($10 trillion for Social Security and $62 trillion for Medicare in present value, beyond what's already promised in future payroll-tax receipts).
Even the modest reform proposed by the 2001 commission would reduce by $15 trillion the amount of general tax dollars necessary to prop up Social Security over the next 75 years. Transition cost: between $1 trillion and $1.4 trillion over 10 years. Done right, in other words, Social Security reform would appear to increase the deficit yet actually reduce the nation's real indebtedness from Day One.
Look at it another way: If a homeowner who refinanced his home on advantageous terms kept his books the way the federal government does, the transaction would be seen as huge annual deficit and increase in his debt. On paper, it would look like his financial well-being had declined drastically, when in fact it had improved.
We can prove this to ourselves by enacting Social Security reform, then offering an additional $1 trillion in bonds into the Treasury market to cover the make-goods for current pensions. The reaction of the market would be . . . nothing.
Unless bond investors are dumb, they'd finance the transition without a hiccup in much the same way housing lenders recently swallowed a vast lump of new housing debt (while extinguishing a fair amount of old debt in the process). Indeed, Treasury investors would look out 30 years at a pleasant sight -- themselves no longer facing a war with seniors for the overcommitted revenues of the federal government.
Fail to get that fix in place, and sooner or later the prospect of just such a war is bound to produce rising interest rates, inflation and other Brazilian symptoms of an impending fiscal crash.