On July 15 the Congressional Budget Office rolled out updated projections that show a precipitous decline in Social Security's solvency. The program's 75-year deficit has nearly quadrupled since 2008, and the trust fund's exhaustion date has moved forward by nearly 20 years. Remarkably, the response by progressives is to expand Social Security's benefits while leaving its multi-trillion-dollar unfunded obligations largely unaddressed.
In 2008 CBO forecast that Social Security faced a 75-year funding shortfall of 1.06% of payroll, which implied that a mere 1.06 percentage point increase in the payroll tax—to 13.46% from the current 12.4%—would keep the system solvent for 75 years. This seemingly minor shortfall caused many on the left—who had fought tooth-and-nail against President Bush's 2005 efforts to fix Social Security—to mock the very need for reform.
The program's deficits were small and distant, the argument then went, the trust fund was projected to remain solvent until 2049, and CBO said its estimates were uncertain, which progressives took to mean that insolvency might never happen at all.
But something has happened since 2008 that even budget hawks have barely remarked on: Social Security's long-term outlook has darkened considerably. Today, CBO projects a 75-year deficit not of 1% of payroll but of 4%. And in place of its earlier prediction that the trust fund would remain solvent until midcentury, CBO today projects that it will run dry by 2030.
Enlarge Image
Getty Images
In dollar terms, the program would need an additional $15 trillion—in the bank today, earning interest—to pay full benefits over 75 years. For those in denial about the trust fund's insolvency: CBO projects a 90% chance that Social Security's trust fund will be exhausted by 2037.
Many factors lie behind Social Security's declining fiscal health. They include a slow economy, rising disability rolls, updated assumptions regarding rising life expectancies, and the simple passage of time. But the fact remains that CBO's best guess is that the Social Security shortfall is roughly four times larger today than it was just six years ago.
The same six-year period since 2008 coincides with President Obama's time in office. Yet apart from the administration's 2013 proposal to reduce cost of living adjustments—withdrawn under pressure from fellow Democrats—the White House has proposed nothing to put Social Security's finances back on track.
It's hard to blame the president alone for backtracking. The consensus among Democrats has gone beyond opposition to benefit cuts. Now they stand almost united in favor of expanding Social Security. Massachusetts Sen. Elizabeth Warren has spoken in favor of increasing benefits, and multiple pieces of legislation have been introduced in the House and Senate to expand the system.
The most responsible bill, introduced on Aug. 14, is from Rep. John Larson (D., Conn.), who at least attempts to balance the system's tax revenues and benefit outlays. But he makes no attempt to hold down costs, even for the highest-income beneficiaries who could and should save more on their own. Instead, his plan implements across-the board increases in the benefits received by retirees, then boosts benefits further by raising annual cost of living adjustments.
Further down the fiscal responsibility food chain are plans from Iowa Sen. Tom Harkin and a joint proposal from Sens. Mark Begich (D., Alaska) and Patty Murray (D., Wash.). The Harkin proposal eliminates the current $117,000 maximum wage on which payroll taxes are applied. This would raise the effective top marginal tax rate on earned income by 12 percentage points. The Begich-Murray plan adds a 4% surtax on all earnings above $400,000.
These were the kind of tax hikes that progressives once counted on to keep Social Security solvent. But in these proposed plans, most of the extra revenues would be spent on increasing benefits. Sen. Harkin's plan extends Social Security's solvency by only 16 years, while the Begich-Murray proposal cuts Social Security's long-term deficit by a meager 3%. How progressives plan to address Social Security's now-$15 trillion shortfall after effectively tapping out high earners for additional taxes is a mystery.
Some current voters may not care. Sen. Brian Schatz, the winner of last week's delayed Democratic senatorial primary in Hawaii, is believed to have won the close race by supporting expanding Social Security benefits.
So, like the orchestra on the Titanic, progressives keep playing the same song even as the Social Security ship goes under. The difference is that the musicians on the Titanic were heroes.
Mr. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.
6a) Beltway 'Strip' Club

Democrats imagine new ways to raise taxes on corporations.


 Not content with the highest corporate tax rate in the industrialized world, President Obama and Sen. Chuck Schumer (D., N.Y.) seem determined to make the U.S. even less hospitable to business. Both are developing plans to make it more expensive for multinational companies to invest in America.

You read that correctly. Their policy answer to the problem of too-few jobs is to raise costs on employers who want to move money from overseas and spend it in the U.S. The President's rhetoric is about targeting "corporate deserters" who have moved their legal address out of the U.S., but his proposals would discourage investment from overseas.
Here's the context: Elections to decide control of the U.S. Senate are less than three months away. If those elections were held today, Republicans would likely capture enough seats to reclaim the majority. Eager to avoid discussion of ObamaCare, the VA, the slow-growth recovery, Russia, Iraq, and everything else in the world that has disappointed the President, Messrs. Obama and Schumer want to return to uplifting conversations about greed and envy.
Hence progressive Washington's new outrage over "income stripping." In political terms, this is the fear that somewhere a corporation may be benefiting from a legal tax deduction as it builds a new U.S. factory. Terrifying, we know.
Enlarge Image
Sen. Charles Schumer Associated Press
More precisely, Washington's tax collectors fear that foreign firms may fund their U.S. subsidiaries with debt so these U.S. units can deduct the interest payments. The foreign parent companies can then receive these interest payments. With more debt held in the U.S., the firms may be able to boost the profits of their overseas units and pay less in taxes, since taxes are lower nearly everywhere else in the world than in the U.S.
A rational person might look at these facts and say that perhaps the U.S. shouldn't tax businesses so heavily. And in truth the corporate income tax is not a very progressive way to stick it to the man. That's because corporations are merely the tax collectors for levies paid by employees via lower wages, shareholders in lower dividends or customers in higher prices. Corporations are also owned by workers of varying income levels via their pension and 401(k) plans.
The White House is nonetheless looking to raise corporate taxes administratively while Mr. Schumer seeks to do so legislatively. Team Obama was thrilled by a recent paper from former Treasury official and current Harvard Law School professor Stephen Shay. Mr. Shay claims that without any change in the law the Administration can simply overturn years of precedent by declaring that some debt will now be treated as equity, and voila, higher tax bills.
This would involve claiming authority under a provision of law known as Section 385 that was not intended to stop corporate inversions, but rather to define generally what is stock and what is debt. As Mr. Shay admits, "Section 385 is not normally thought of as an antiabuse provision (indeed, it has hardly been thought of at all since it was amended in 1992) and this proposal is to apply it to only a subset of related party cases—those involving expatriated entities."
No doubt a wave of lawsuits would follow. But if Treasury is looking for a short-term political victory it could issue a temporary regulation, avoid the usual notice and comment period, and earn headlines by interrupting pending inversion deals. Another full election cycle might pass before the courts rule on the legality of this tax grab.
The Harvard Law brand might seem to lend some heft to this novel idea, but in his paper Mr. Shay credits the intellectual contributions of two, er, scholars from Change to Win, the advocacy shop funded by labor unions. And nobody does disinterested legal analysis like the Teamsters.
As for the legislative option, Mr. Schumer hasn't released the details. His challenge will be to craft the bill so that it punishes the companies he claims it is intended to punish—those that move their legal headquarters out of the U.S.—without also punishing foreign companies that may decide it's not worth it to fund the marginal venture in the high-tax U.S. market.
Mr. Schumer will need to hurry in drafting his bill if he wants a vote during the two weeks in September when the Senate will be in session again before adjourning for the election. A cynic would say this whole exercise is to force Minority Leader Mitch McConnell (R., Ky.), up for re-election this fall, to take a tough vote on "corporate deserters."
And the response from one key Democrat suggests how seriously we should take the Obama-Schumer-Shay campaign for higher taxes. Senate Finance Chairman Ron Wyden, whose committee enjoys jurisdiction over tax laws, last week thanked Mr. Schumer for his work on the topic but added that "my team is working with [Republican] Senator [Orrin] Hatch's team to put a bipartisan, Committee lens to the issue."
Reasonable people can disagree on whether interest deductions should be reduced or eliminated as part of a thoughtful simplification effort that lowers America's stratospheric corporate tax rate. But simply raising tax bills on politically unpopular companies will likely have only one result: those companies will create fewer jobs in the U.S.
----------------------------------------------------------------------------------------------------------------------------