A Stitch in Haste

Remember Robert Pozen, the lawyer-economist who had found a "solution" to the Social Security crisis that he called "progressive indexing" (an absurd nomenclature given that Social Security is already a highly progressive income redistribution scheme)?

Well, he's back: (WSJ - $)

A progressive approach to Social Security is justified because federal taxes forgone from 401(k)s and IRAs exceed $50 billion per year -- which primarily benefit high and middle earners.

This is, of course, utter nonsense (not to mention a grammatically flawed sentence). It is, in fact, a flat-out lie. Monies diverted into 401(k) or Individual Retirement Accounts are still subject to FICA taxation when paid. They are only excluded from federal income taxation, not Social Security taxation.

And even that isn't entirely accurate. Tax-advantaged retirement accounts are (mostly) tax-deferred vehicles, not tax-exempt vehicles. You may not pay federal income tax on money you divert into your 401(k) today, but you will pay federal income tax when you withdraw the money upon retirement. "Paying tax tomorrow instead of today" is not the same as "not paying tax at all." "Taxes deferred" are not "taxes forgone." (The de minimis exception is when the retiree dies before withdrawing the money, although the estate tax recaptures some of that "lost tax" as well.)

Bottom line: Liar, liar, pants on fire.

And again, this entire analysis has absolutely nothing to do with Social Security taxes, which are extracted, upfront, even from wages that end up in a 401(k) or IRA. Recall also that those who amass significant retirement portfolios are precisely those who are doing what everyone says we ought to be doing more of: saving. And these are the people Pozen wants to blame and punish for "short changing" Social Security?

Madness. Sheer madness.

The Social Security crisis can only be resolved by tweaking some combination of three dials on the federal government's fiscal machinery:

1. Raise federal taxes (e.g., eliminate the wage cap), the federal deficit (i.e., do nothing), or both.


2. Cut benefits, either actual (yeah, right) or projected (e.g., Pozen's progressive indexing).


3. Restrict eligibility (e.g., by raising the retirement age).

Pozen is clearly championing #2, which is perfectly fine, although I prefer as much reliance on #3 as possible first. But don't defend your subjective preferences with lies and distortions. We've had over 70 years of lies regarding Social Security, and that's precisely why we're in the mess we're in.

The truth may hurt, but in the end it will set us free.