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Wednesday, June 25, 2008

WSJ: Obama's Social Security Fine Print

Wall Street Journal:  Obama's Social Security Fine Print, by Donald L. Luskin:

Last week, Barack Obama revealed his plan to shore up Social Security's shaky finances by raising the income level on which the payroll tax is applied. Currently, incomes above $102,000 are exempt, with that threshold rising every year indexed to wage inflation. Mr. Obama would keep that limit in place, but then assess payroll taxes on incomes above $250,000, which his campaign claims would apply to only the richest 3% of Americans. ...

Combined with Mr. Obama's other tax-hike initiatives, "the total tax on labor would be close to 60%. In high-tax states like California and New York, the top rate would be even higher."

Would it help Social Security's financing problems? Mr. Obama has no idea. One of his senior economic advisers admitted to me that no one on the campaign has run any detailed models or performed any rigorous analysis. When one proposes an enormous tax increase, shouldn't there at least be a spreadsheet somewhere? ...

But the most alarming thing about Mr. Obama's proposal is that the $250,000 threshold, above which the payroll tax would be applied, refers to household income, not individual income. ...

But that tax bill could be higher still. While the payroll tax has always been calculated just on wages from labor, Mr. Obama hasn't decided yet what forms of income will be included in the $250,000 threshold. It's an open question whether it might include interest on savings and capital gains income.

And neither has Mr. Obama said whether the rich – and, truth be told, the middle class – paying his new higher taxes will get correspondingly higher Social Security benefits when they retire. Throughout the history of the Social Security program, there has always been a connection between what you contribute in taxes and what you get back in benefits. If Mr. Obama uncaps the wages subject to tax, but doesn't uncap benefits, then he has severed the link between them. Social Security would stand revealed not as a work-related contributory retirement system, but simply as a tax-funded welfare and income-redistribution program.

And for all that, Mr. Obama's proposal won't help Social Security's long-run solvency problems.

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Mr. Luskin wrote,

"Worst of all, even the small contribution to Social Security solvency that Mr. Obama's plan might make is entirely illusory. In fact, the more taxes his plan collects, the worse Social Security's long-term situation gets. That's because all plans based on collecting taxes and saving them in the Social Security Trust Fund for future benefit payments rely on the U.S. government being able to redeem the Treasury bonds that trust fund holds."

Watch out when someone tries to tell you something is illusory, as Mr. Luskin has tried to do. Without an increase to the Social Security Trust Fund as suggested by Barack Obama, the Treasury bonds that the trust fund would hold would likely be in the hands of a foreign country which would have to be paid when the bonds come due AND the Social Security Trust Fund would be closer to collapse. Perhaps that is the result that Mr. Luskin favors.


Posted by: WD Kebschull | Jun 25, 2008 12:05:42 PM

This would be the same Donald L. Luskin that Brad DeLong refers to (or at least used to) as the "stupidest man alive"?

Posted by: Ugh | Jun 25, 2008 12:53:01 PM

I am happy that somebody has finally noted the relationship between covered social security income and benefits as in the second to last paragraph above. I was a Social Security employee until a year ago, and I find Senator Obama's plan appalling. I wonder if his advisors even looked at plans that have been discussed by Social Security's Chief Actuary. They are online for his reading pleasure at the actuary's website.

Posted by: Sal Giorgio | Jul 31, 2008 12:46:39 AM

"Social Security is NOT Broken!"

By George Fulmore

The claims that the Social Security system is "broken" are as phony as those that told us that weapons of mass destruction were to be found in Iraq.

The annual reports by the Social Security and Medicare Trust Funds trustees have said for years that payouts from the system were solid for the next 35 to 40 years. In 2001, it told us that 2038 was the year. In 2006, we're told it's 2040.

But in 2001, the Bush administration began to proclaim that the System was "broken." A commission appointed by the President told us that deep benefit cuts, tax increases or massive federal debt were inevitable if Social Security was not fixed.

But the way it works is simple: collect enough to pay your bills, then save the excess for future needs.

The 2006 report says that $1.6 trillion has been deposited into the Social Security Trust Fund as of the end of 2005. It also says that more is coming each year for the next ten years: a total of $2.3 trillion more! Thus, by 2015, the Social Security Trust Fund is projected to hold more than $5.0 trillion in savings.

Considering that the total annual budget of our federal government is less than $3 trillion, that's a ton of money!

So, how can a system that continues to collect more than it pays out, is projected to do so for at least another 10 years, and is projected to have more than $5 trillion in savings by 2015 be "broken?" It can't be.

The real problem is that no real money has or is being put into the Social Security Trust Fund.

The real problem is that Congress and the Bush administration simply spend the Social Security surplus year after year, rather than put that money where it really belongs.

The real problem is that those who tell us that the system is "broken" have no intentions of reimbursing the Trust Fund for the missing $5 trillion!

The trustees' report should tell us that the Social Security Trust Fund is dry. But it doesn't. It says, in so many words, that if there was real money in the Fund, for the years between 2017 and 2027, we would only need to tap the interest paid on the principal. Then, only after 2027, would we need to tap both the interest and principal. Dire projections past 2040 are based on "assumed" future interest rates and rates on fertility and immigration.

The bottom line: A game is being played here by people who have no intention of repaying the Social Security Trust Fund, now or in the future, and have every intention of reducing or eliminating promises made to retired Americans.

Posted by: George Fulmore | Sep 8, 2008 10:58:49 PM