How to cut Social Security and live to tell about it

President Bush and, in a separate effort, Sen. Lindsey GrahamLindsey GrahamObama nominates ambassador to Cuba Funding bill rejected as shutdown nears Shutdown risk grows over Flint MORE (R-S.C.) and a group of bipartisan moderates are try to figure out a way to cut Social Security benefits or increase the taxes that fund the system without getting killed politically in the process. Everybody recognizes the truth of what Federal Reserve Chairman Alan Greenspan said: that privatizing a portion of the system is a good idea but will not undo — and might just worsen — the deficits the system as a whole faces. The hard facts are that benefits must be cut or taxes increased or the system won’t make it.

President Bush and, in a separate effort, Sen. Lindsey Graham (R-S.C.) and a group of bipartisan moderates are try to figure out a way to cut Social Security benefits or increase the taxes that fund the system without getting killed politically in the process.

Everybody recognizes the truth of what Federal Reserve Chairman Alan Greenspan said: that privatizing a portion of the system is a good idea but will not undo — and might just worsen — the deficits the system as a whole faces. The hard facts are that benefits must be cut or taxes increased or the system won’t make it.

Surprisingly, Bush seemed to leave the door open recently to an increase in the ceiling up to which the payroll tax applies. Various proposals have involved raising the cutoff from its current $90,000 limit to $200,000. While Bush has precluded any increase in the Social Security tax rate, he has appeared yet to rule out any such an increase.

Good for him. A dose of fiscal reality will go a long way to ameliorating the Social Security problem. But it must be accompanied by a similarly strong dose of political reality.

If Bush and the Republicans just increase the ceiling on the tax, they will sell out the very voters who put them in power. Nobody is going to maintain that an increase in the limit on the payroll tax is not a tax hike or that there is any real difference between a rise in the rates and a hike in the income on which the rates apply.

But there is a way Bush can make it work. His current thinking on Social Security would allow each person paying taxes into the system to invest privately four percentage points of his income — or about one-third of the total tax. It is the diversion of the revenues those four points produce that is scaring Greenspan and other responsible observers of the system.

But Bush could propose that those who are currently at the $90,000 limit would not be permitted to divert four points to private investment. They would have to take the share of their taxes that they channel through personal accounts out of the increased amount they will have to pay because of the raise in the ceiling. All or part of that increased amount could be available to them for private investment.

If all of it were to be available, they would, in effect, be paying a tax increase to themselves and the hike would simply seem like a mandatory stimulant to the personal savings they know they should be setting aside in any event. And the four points that they would not be able to earmark for private investment would no longer be diverted from the Social Security coffers and would not figure into the deficit calculation.

Even if the taxpayers who make more than the $90,000 ceiling were not allowed to keep all of the increased payment, but only half of it, the tax increase would go down much more easily since at least half of the money would, in effect, be a payment to themselves.

Bush and Sen. Graham’s group should also consider the following other proposals to cut the deficit without cutting their own throats in the process:

• As suggested earlier in this space, index the retirement age to life expectancy. Over the next 40 years, the change will be dramatic and the savings will be substantial.

• Provide for a cut in cost-of-living adjustments for future retirees as long as they pay their current tax levels. However, give them the option of maintaining the current value of their Social Security retirement funds, even in the face of inflation, by indexing their tax rates to reflect the increased costs of adjusting for the cost of living. Everybody understands that the cost of living is going up and that taxes must either keep pace or benefits must be cut. But if you give them their choice of a cut in benefits or a commensurate increase in taxes, it will seem fair and political unobjectionable.

These steps can make cutting Social Security — or at least funding it for the future — an exercise that one can survive politically.

Morris is the author of Rewriting History, a rebuttal of Sen. Hillary Rodham Clinton’s (D-N.Y.) memoir, Living History.