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This is the third in a series of articles on Social Security reform, and the second of three discussing the "FairTax Plan."

The previous column in this series discussed the benefits of the "FairTax Plan" to replace most federal taxes with a single consumption tax. This and the following column discuss its fatal flaws.

Major structural change does not happen very often. For that matter, the political consensus or will to even attempt major change occurs only about once a generation: consider the spacing between the Civil Rights Act and The Great Society, the Reagan tax reforms, and Hillarycare. We are once again at such a point with Social Security reform. Something is likely to happen, but it defies belief that we could build the consensus to have two major reforms, one of which would modify the other.

Herein lies the first major problem with FairTax: it replaces the Social Security tax, but otherwise leaves the current system intact. FairTax will require a constitutional amendment, granting Congress the authority to assess the new direct tax, and simultaneously repeal the Sixteenth Amendment allowing the income tax. Assuming that this passes both houses of the Congress with a two-thirds vote, it must then be ratified by three-fourths of the states. Such an endeavor will fully occupy the national political attention for a period of years; there simply will not be room for a second major reform. Important and valuable as the switch to a sales tax would be, it is not nearly as important as moving on Social Security.

The need to reform Social Security has been clear for decades. Many scoff at the sense of urgency, as the fund will not be insolvent for several decades. This overlooks what it will mean for the system to reach insolvency. Currently, there are enough workers per retiree that the money flowing into the system is more than is paid out to retirees, creating the "surplus" in the system. In about a decade, this will not be the case, and payments will rely upon both contributions and the accumulated surplus. The insolvency occurs when the accumulated surplus has been exhausted. At that time, all that will be available with which to make payments will be the new contributions--which will only cover approximately two-thirds of the benefits being paid. There are various estimates for the magical year of collapse and how close to two-thirds the payments will be, but the fundamental problem will remain that the program will not even be close to being capable of meeting its obligations.

All of the serious reform proposals have the common element that some portion of current payments will be placed into investments with a return better than the treasury bonds currently used. Over the course of a worker's earning years, this will produce a larger sum available to support the worker come retirement.

Many critics of reform argue that there is plenty of time in which to save the system, as the crisis is decades away. Indeed, it is truly unusual that a problem that will happen not only after the next election, but a score of elections away, is getting political attention and focus. In fact, a significant portion of the politicians on both sides of the debate would have long since passed at that time (It is also odd to see them criticized for behaving in a responsible manner!). However, this is a problem that needs to be addressed now. Every single year that we put off reform makes the ultimate solution a bit harder, and the reforms a bit less effective for the the current workers. If we act now, there will be enough in the system to provide for their retirements. If we wait a decade, or a generation, there simply will not be enough there.

This is the urgency which makes the FairTax plan the wrong choice right now. If it were to pass, it would be a decade or more before serious Social Security reform were again at the top of the political agenda. It would also introduce new barriers to reform which will be discussed in the next column. We just cannot afford to wait.

Next week: How the FairTax would break the social contract of Social Security

© Richard Edmund Hawkins, MMV

Related Columns

Why I didn't sign the FairTax letter :

Social Security is indeed a Ponzi operation--but that is not a problem :

Links of interest

FairTax Plan home page

The homepage for the FairTax Plan, which explains the proposal in far more detail. Read

Patrick Moynihan on Social Security

In a call for reform from the left, the former Senator suggests small private accounts, raising the wage ceiling, a reduction in the payroll deduction that may optionally be invested in new private accounts, and other adjustments to save the current system--and emphasizes that the money belongs to the workers, not the government. Read

The Cato Insitute's Response to Sen. Moynihan

At another end of the political spectrum, the Cato Instituted notes that the Senator's willingness to consider private accounts is significant, and calls for complete privatization. Read

Dr. Hawkins is a statistician, antitrust attorney, and Assistant Professor of Economics at the Pennsylvania State University.

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