Social Security Reform: An On-Ramp for the Expressway to Economic Freedom

Friedrich A. von Hayek, one the giants of classical free-market economics, warned that The Road to Serfdom results from the unintended consequences of market interventions by governments, leading to economic distortions that ultimately lead to further interventions. He noted that liberty is lost – gradually, incrementally, inexorably – with each subsequent intervention descending down the road to serfdom.

Is the United States heading down such a path? I hope not, but I have been worrying for some time that we might be. By pursuing an ownership society through Social Security reform, tax reform and tort reform, President Bush seems determined that we do not head farther down the road to serfdom but instead get on the expressway to economic freedom.

In the modern age the road to serfdom may not solely result from anti-market interventions but may also include the inability – or unwillingness – of political leaders to eliminate anti-market barriers already on the books.

In his book Hayek exposed the primary fallacy of central planning: the impossibility that all knowledge can be brought together in a few genius individuals, “the best and the brightest.” Economics, markets, statistics and history conclusively dispel any such assertion.

Presently the American economy, despite its resilience and our nation’s entrepreneurial acumen, is suffering from a 75-year hangover remaining from a number of failed and failing socialist projects. The most evident examples are our ailing and out-of-date entitlement programs, our confiscatory tax code and increasing regulatory burden. As such, it is not enough to maintain the status quo. We must reform these systems, remove barriers and eliminate as much of this dead-weight loss from our economy as possible. And that is exactly what the president has set out to do.

Last week the Wall Street Journal/Heritage Foundation released their annual “Index on Economic Freedom,” which concluded for the first time that America no longer ranks among the top 10 freest economies in the world – this despite the fact that our score remained unchanged from the previous year. Instead we fell in the ranking because while we were trending water, Chile, Australia and Iceland further opened their economies and surpassed us.

America’s worst index category was the “fiscal burden” of government, due to Washington’s rapidly growing spending and one of the highest corporate tax rates in the world. Excessive regulation is another reason the United States failed to the make the top 10.

While not mentioned specifically by the index, Social Security is a major piece of the federal government’s budget, and due to the well-meaning but flawed pay-as-you-go structure of the program, Social Security reform looms as one of the greatest barriers to sound budget policy. Ironically, however, this problem also creates perhaps the greatest opportunity to expand economic freedom in our lifetimes.

On this front we cannot afford to continue to put our heads in the sand. If we do nothing, we will fall behind. We are already behind. More than 20 nations have already reformed their retirement security programs, replacing pay-as-you-go systems with personal accounts that workers own and control. In fact, Chile – a nation that passed us on the index this year – was the first nation to create personal accounts.

That said, the ideas for reform reported in the press this week, if acted upon, would represent another missed opportunity rather than a step in the right direction. Just as we cannot afford to do nothing, we cannot afford to take one step forward, two steps back. We cannot pass just any reform proposal and call it a day. We cannot pass a reform proposal with accounts that are too small to fundamentally reform the system. On this score there can be no compromise.

Another area we are falling behind is in our tax policy, despite the positive impact the 2003 tax rate reductions have had on economic growth. This year Romania and Georgia joined the “flat-tax club,” bringing the number of nations in Europe to adopt the flat tax to eight. So far, Georgia has the lowest flat tax of 12 percent on corporate and personal income.

Here in America, both the individual income and corporate income tax codes are in dire need of reform. We need to move further toward removing barriers to work, saving, investing and entrepreneurial risk-taking. On this front we definitely cannot afford to stand still.

At a minimum, we need to make permanent the 2001/2003 tax-rate reductions and index the alternative minimum tax for inflation. As recent data shows, tax receipts are on the rise, and if unchecked through further tax relief will continue upward to historic levels, slowly but surely dragging the economy down over the long run.

The president’s new commission on tax reform, headed by the capable leadership of Connie Mack (R.-Fla.) and Sen. John Breaux (D.-La.) should not waste time exploring “revenue enhancers” of any sort. If the commission proposes to eliminate credits, deductions and exemptions, closing these loopholes must be more than offset by reductions in the rate structure, both individual and corporate, and eliminate entirely taxes on savings and investment. And they should keep a keen eye on international tax competitiveness.

In today’s world, the road to serfdom – a road well traveled during the 20th century – is not only paved with good intentions but also seems to contain a slippery slope left over from socialist policies from previous administrations that, if left in place, will force us to run faster and faster just to stand still while other counties continue to pass us as they ride by in the flat-tax fast lane.