NCPA - National Center for Policy Analysis


October 15, 2004

Sen. John Kerry says he will use the "pay-as-you-go" approach to ensure financial solvency for Social Security. This approach has proven ineffective in imposing fiscal discipline in our entitlement programs, say Jagadeesh Gokhale (Cato Institute) and professor Kent Smetters (Wharton College).

Pay-as-you-go in this context usually implies benefit increases -- for which retirees obviously don't pay -- and tax increases for workers and future generations. The taxpayers' higher future benefits never make up for their earlier payroll tax hikes in present value -- and future benefits remain subject to changes. Consequently, today's retirees (who vote in larger numbers) receive windfalls, but workers and future generations lose out.

Pay-as-you-go, therefore, has resulted in our future benefit commitments far exceeding our ability to pay, say Gokhale and Smetters.

  • The financial imbalance is now estimated by Social Security's independent actuary to equal $10.4 trillion; for Medicare, the overall shortfall is even larger -- $62 trillion.
  • They estimate that rejecting an attempt to control the growth rate of costs implies an immediate and permanent tax hike of 17.4 percentage points; that would more than double the current payroll tax rate of 15.3 percent.
  • Inaction over another four years will increase the required hike to 19.7 percentage points; a recent study by the latest Nobel laureate for economics, Ed Prescott, points out that higher tax rates will slow economic growth.

As the aphorism goes: When you're in a hole, stop digging. A promise of inaction or, at best, of continuing to use the pay-as-you-go approach, is not a solution to our entitlement programs' financial travails. It is an invitation to continue digging deeper, say Gokhale and Smetters.

Source: Jagadeesh Gokhale and Kent Smetters, "Pay (Through the Nose) As You Go," Wall Street Journal, October 15, 2004.

For WSJ text (subscription required),,SB109779585821146113,00.html


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