SOCIAL SECURITY: THE EFFECTS OF CHANGE : And Now, Even More Taxes : If Moynihan gets his way, we are headed for huge problems, including intergenerational conflict.

A public debate has focused on Sen. Daniel Patrick Moynihan’s bill to cut the Social Security payroll tax rate. Many have concluded that the New York Democrat has seized the political high ground by proposing to cut the tax on labor while President Bush is proposing to cut the tax on capital with a lower capital gains tax rate.

The many people offering their opinions are apparently unaware that Moynihan’s payroll tax cut is temporary and that his bill contains provisions to raise the Social Security tax rate by 30% in the future. Suppose President Reagan had proposed a bill that initially cut our tax rates but provided for even higher rates in the future. Everyone would have been up in arms.

Moynihan’s critics have said that he is sneaky and that his motive is to deprive President Bush of Social Security revenues in order to force him to break his pledge against a general tax increase. Few realize that Moynihan’s Social Security tax cut is not a tax cut at all, but the truly sneaky aspect of Moynihan’s bill is that it disguises the economic crisis that Social Security is brewing.

Social Security is a pay-as-you-go system. As the proportion of workers-to-retirees shifts, Congress has to periodically make adjustments to the tax rate and benefit payments. Normally, Congress raises the tax rate a little and cuts back, not on benefits, but on the scheduled growth in future real benefits.

Normally, Social Security actuaries alert Congress to looming imbalances before they occur, thus providing the political process time to head them off. Moynihan’s bill, however, disrupts this mechanism for maintaining a balance between the burden on taxpayers and the benefits of retirees.

By building in automatic Social Security tax increases through the year 2045, Moynihan’s bill guarantees that the Social Security tax rate will rise inexorably to fund a continual growth in real Social Security benefits. Since automatic tax increases will prevent future Social Security deficits, the actuaries will have smooth sailing. Future Congresses will never be called upon to make the political trade-offs between taxing workers and paying benefits.

Should Moynihan’s bill pass, two big problems will result. Unless the formula that determines the growth of Social Security benefits is adjusted, future retirees will receive up to three times the purchasing power of today’s retirees. This represents a huge burden on tomorrow’s workers, especially since their numbers are expected to be fewer in relation to the number of retirees than today.

Projections show that in the future there will be only two workers to support each retiree, a burden that, with the growth of benefits, would leave workers unable to support their own families. Not even guilt-ridden American taxpayers are likely to become wage slaves for retirees.

Therefore, Moynihan’s plan guarantees a future political blowup.

The other problem that Moynihan’s bill would cause is unemployment. American labor, which is still the most productive in the world (Japan’s growth of productivity is faster but our level is higher), is already finding it difficult to compete in markets at home and abroad. Moynihan’s 30% hike in the tax on employment would simply price American labor out of the market, resulting in either mass unemployment or a totally protected and isolated economy.

Moynihan’s plan would deprive future politicians of warnings signaling both a buildup in unemployment and intergenerational political conflict. We should not have to wake up one day and find that these two monsters have sneaked up on us as a result of legislation that cancelled our warning system.