Social Security: Bush-Pozen Rejects Laffer-Prescott

Kash comments on Bush’s quote noted in a Reuters article on Social Security:

Bush said “my idea” is that Americans at lower income levels would see benefit payments continue on the current basis, but “if you’re a wealthier citizen, your benefits increase at the cost of living … so everybody’s benefits go up but some go up faster than others.”

Kash notes:

And much more importantly, I was surprised that he made no mention of any effort to address the fiscal problem that makes the Social Security gap look tiny by comparison: the impending fiscal crisis that will be brought on by federal health spending in coming decades.

But I want to focus on how Bush’s love for the Pozen plan puts him at odds with Edward Prescott’s brand of supply-side economics as evidenced by his interview with the Arizona Republic:

“It’s easy to get over $200,000 in income with two wage earners in a household,” Prescott said. “We want those highly educated, talented people to work.”

Well maybe it’s not so easy for everyone. Prescott’s Why Do Americans Work So Much More Than Europeans? worried that payroll contributions would be viewed as employment taxes and generate disincentives to work:

In some countries, some social security taxes are savings because benefits increase with income. But this is a marginal tax rate. Often there are no additional benefits to working an additional year. In the United States, the marginal savings factor is tiny. First, when I use a 4 percent discount rate and a 2 percent growth rate in the real wage, which are numbers for the U.S. economy in the twentieth century (McGrattan and Prescott 2003), the present value of benefits is only one-quarter of the present value of contributions. Second, the social security benefit scheme is highly progressive. Third, benefits to married couples typically go up little if both people work rather than if only one works. Fourth, beginning in the early 1990s, a significant part of social security benefits is subject to income taxes for many people. Fifth, for many older workers, their current-year taxable labor income has little or no consequences for the retirement benefits they receive.

As AB readers know, I’m not that impressed with Laffer curve arguments as a rule and I have tended to suggest that if the current system is maintained (let’s hope, let’s hope) much of what we pay into the system can be seen in some sense as savings and not an employment tax. Prescott is sort of agreeing with this point of view but he does suggest a few reasons why higher income workers might see at least part of their payroll contributions as employment taxes on the margin. Given his concern about the incentives for “highly educated, talented people to work”, I have to wonder if Dr. Prescott is not happy that President Bush has turned into such a liberal with this Pozner plan?