War on the Middle Class

During most of the Republican Party’s history they have objected to programs for the poor, depicting them as the undeserving, whose shiftlessness and laziness has resulted in their sorry state. This attitude was best exemplified in Reagan’s fictitious “Welfare Queen” which he rolled out in 1976 with this description, “"She has 80 names, 30 addresses, 12 Social Security cards and is collecting veteran's benefits on four non-existing deceased husbands. And she is collecting Social Security on her cards. She's got Medicaid, getting food stamps, and she is collecting welfare under each of her names."

Now, however, Republicans attack Democrats for being for the middle class and not focusing enough attention on the poor. Thus Republican columnist, David Brooks, wrote in last Sunday’s NY Times, “Raising the minimum wage won’t be of much benefit to the working poor. Only 0.6 percent of all wage workers make the minimum (and) a mere 12.7 percent of the benefits of a federal minimum wage hike would go to poor families, while 63 percent would go to families earning more than twice the poverty line.” Even if this is correct, (Brooks gives no study to support this conclusion) his objection speaks worlds to the new Republican attitude. In 2005 the poverty threshold in the U.S. for a family of four was $22,951. Thus twice that, or $46,000 would place a family of four into the lower middle class. Is there anything wrong with extending a helping hand to people in this income category?

Possibly more striking is the approach to Health Care proposed in the President’s State of the Union Speech. Having again and again reduced taxes on the very wealthy and having vowed no tax increases for anyone, the Administration now proposes to penalize people who have health insurance through their employer by taxing this insurance. This would most certainly strike at the middle class. In his weekly radio address Bush did not address the inefficiency of the present system which is the most expensive in the world, but rather decried, the system for “unwisely encourag(ing) workers to choose overly expensive, gold plated plans…”

While proposing increased taxes on the middle class, he and his party continue their attack on Social Security, warning that unless “something” is done the system will go bankrupt, though whether that is true is debatable. According to the Social Security trustees the payroll tax revenues currently exceed benefit payments so that there is now a growing surplus that would allow present benefits to be paid in full for the next 28 years. After 2034 a problem is projected in that surpluses now building up will be exhausted. At that point the fund will only have enough income to pay 70 percent of benefit payments. However, these projections are based on the economy expanding at a rate of 1.5 percent per year over the next 75 years. This rate is about half the average rate of growth over the past 75 years. Therefore an assumption of rate of growth of 2.5% is reasonable. If that assumption is made Social Security is solvent and running a surplus ad infinitum.

So what is all the hullabaloo about? It has only one purpose and that is to justify the privatization of this system with “private accounts’, which in fact would quickly bankrupt the system. In other words we fix something that isn’t broken by abolishing it.

Caution does dictate some adjustments, which Republicans oppose because they mean higher taxes. Yet as can be seen, The Administration has no objections to higher taxes provided they are on the middle class and serve no useful purpose. Reagan, who initially also wanted to privatize Social Security, in the end agreed to a bill that increased the number of people covered by the program including members of Congress, and government employees, increased Social Security tax rates from 6.6% to 7.0 percent in 1984, and 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter. At the same time he raised the age for eligibility for unreduced retirement benefits in two stages to 67 by the year 2027. Workers born in 1938 will be the first group affected by the gradual increase.

Nevertheless, as a precaution against Social Security running into difficulty the date when the 67 eligibility standard kicks in could be moved up to 2015, provided the cap on income to be taxed for Social Security is also raised. Under current law, Americans pay a 12.4% Social Security tax on all wages up to $94,200 in 2006, and the cap rises each year with inflation. (There is also an uncapped 2.9% Medicare payroll tax on top of that.) This cap could be lifted by $10,000 a year until it reaches $150,000. The trust fund should also be taken out of the budget where it masks a deficit much larger than the one shown and should be treated like state pension funds, allowing the trustee manager to make conservative investments of part of the fund in the stock market. An S&P Index Fund would be such a conservative investment and would entail very little in management costs. Then if we find that the income for the fund exceeds needs, an increase in Social Security payments, or a reduction in payroll taxes for the lower incomes, could be contemplated This is important at a time when corporations seem to be cutting pension benefits, forcing wage earners to rely ever more on their Social Security benefits. If needed it could be used to shore up Medicare, which is more vulnerable than Social Security.

What is particularly interesting in this hullabaloo is that a new rationale is being offered for destroying this treasured benefit. In December 2002 the Vice-President declared, “Reagan proved deficits don't matter.” Now, Republicans argue, deficits matter, but we must not stop cutting taxes for the rich-it is entitlement that we can’t afford. As shown above, the most important entitlement pays for itself. Rather than a drag on the treasury, it masks the size of the deficit.