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Willisms

« Wednesday Caption Contest: Part 135. | WILLisms.com | Wednesday Caption Contest: Part 136. »

Social Security Reform Thursday: Week Seventy-Four -- Barack Obama Has A Plan.

reformthursdayblue.gif

Thursdays are good days for reform, because they fall between Wednesdays and Fridays.

That's why WILLisms.com offers a chart or graph, every Thursday or so, pertinent to Social Security reform.

This week's topic:

Obama's Plan For Social Security.

Barack Obama has a plan for the future of Social Security. That's potentially good news, since it means it will inevitably pop up as an issue in debates this year. When people actually discuss and think about Social Security, it drives them toward reform. When looking at reform options, personal accounts are the best option out there.

Unfortunately, Obama's plan is just potentially good news. In reality, it's dreadfully awful. His plan is to raise the Social Security payroll cap. That's pretty much it. A tax hike. On Social Security.

The gist of the plan:

obamasocialsecurity.gif

Fascinatingly, Hillary Clinton has hardly made a peep about Barack Obama's plan to raise Social Security taxes. This is a huge issue. People don't like their Social Security being messed with, and Barack Obama's plan fundamentally changes the nature of the system. Right now, it's at least a faux-retirement plan. Obama's changes shatter any pretense of that, whatsoever. Obama's plan turns Social Security into a full-fledged collectivist wealth confiscation/redistribution program, both in practice and in perception.

This is what Obama says regarding Social Security, in his Blueprint For Change:

Protect Social Security

Obama will preserve Social Security by stopping any efforts to privatize it and working in a bipartisan way to preserve it for future generations.

....

Protect Social Security
Obama is committed to ensuring Social Security is solvent and viable for the American people, now and in the future. Obama will be honest with the American people about the long-term solvency of Social Security and the ways we can address the shortfall. Obama will protect Social Security benefits for current and future beneficiaries alike. And he does not believe it is necessary or fair to hardworking seniors to raise the retirement age. Obama is strongly opposed to privatizing Social Security.
Obama believes that the first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century.

....

Social Security and Pensions
In the midst of the 2005 debate over Social Security privatization, Obama gave a major speech at the National Press Club forcefully arguing against privatization. He also repeatedly voted against Republican amendments that aimed to privatize Social Security or cut benefits.

So, on the one hand, he'll be bipartisan and honest about the long-term challenges to the solvency of Social Security. On the other hand, he'll repeatedly work against Republicans and not do anything that actually addresses the solvency of Social Security.

Message to Obama and people who have bought into the notion of change: On Social Security, you are not the candidate of change. You are the candidate of 1930s-era status quo. You can't solve this thing in a bipartisan way if you're taking personal accounts off the table.

Some key elements of the Obama plan:

Mr. Obama's proposal is to make a significant change to the payroll tax system. Currently, all wages below about $100,000 are subject to a 12.4% Social Security payroll tax. But all wages above that amount are not subject to the tax. Mr. Obama wants to eliminate the cap, but, in a concession to taxpayers, exempt wages between $100,000 and $200,000. He wants to create a "donut hole" in the taxing mechanism that pays for the nation's largest retirement program.

The problem is two-fold: His proposal would be a very large tax hike, yet it won't be enough.

Mr. Obama's plan fixes less than half of Social Security's long-term deficit, making further tax increases inevitable. The Policy Simulation Group's Gemini model estimates that Mr. Obama's proposal, if phased as Mr. Obama suggests, would solve only part of the problem. A 10 year phase-in, for example, would address only 43% of Social Security's 75-year shortfall. And this is assuming that Congress would save the surplus from the tax increases -- almost $600 billion over 10 years -- rather than spending it, as Congress does now.

What's more, Mr. Obama's plan would keep Social Security in the black for only three additional years. Under his proposal, annual deficits would hit in 2020, instead of 2017. By the 2030s the system would still run an annual deficit exceeding $150 billion.

Mr. Obama's modest improvements to Social Security's financing come at a steep cost. The top marginal federal tax rates would effectively increase to 50.3% from 37.9%, equivalent to repealing the Bush income tax cuts almost three times over.

If one accounts for behavioral responses, even the modest budgetary improvements from Mr. Obama's plan are likely to be overstated. If employers reduce wages to cover their increased payroll-tax liabilities, these wages would no longer be subject to state or federal income taxes, or Medicare taxes. A 2006 study by Harvard economist and Obama adviser Jeffrey Liebman concluded that roughly 20% of revenue increases from raising the tax cap would be offset by declining non-Social Security taxes. Assuming modest negative behavioral responses, Mr. Liebman projected an additional 30% reduction in net revenues, leaving barely half the intended revenue intact.

Mr. Obama's plan would also dramatically raise incentives for tax evasion, further degrading revenue gains. Many high-earning individuals evade the Medicare payroll tax by setting up "S Corporations," paying themselves in untaxed dividends rather than taxable wages. John Edwards avoided $590,000 in Medicare taxes this way in the 1990s. Under Mr. Obama's plan, Mr. Edwards's savings would have exceeded $3 million. With that much at stake, the incentive to follow Mr. Edwards lead will be that much greater.

Mr. Obama's plan shows the limits to taxing the rich as a solution to Social Security's problems. Top earners would effectively be tapped out, with taxes as high as economically and politically feasible, yet most of Social Security's deficit, and the much larger shortfalls in Medicare, would remain.

The U.S. already collects far more Social Security taxes from high earners than other countries do. Social Security taxes here are currently capped at about three times the national average wage -- far above other developed countries. In Canada and France payroll taxes are levied only up to the average wage. In the United Kingdom, taxes stop at 1.15 times the average wage; in Germany and Japan at 1.5 times. Social Security is already more progressive than these countries' pension programs, and Mr. Obama's plan would make it more so.

The payroll tax rate has climbed substantially over the years:

payrolltaxratesup.gif

And yet, the system still careens toward insolvency. Obama's tax cap removal just amplifies the pain without even fixing the problem; Obama, on this one, seems to value process over results. As long as taxes are higher, it doesn't matter that the plan doesn't actually fix Social Security or make it a better, more fair program. Barack Obama would also deprive people of compound interest-bearing personal accounts.

The one intriguing thing about Obama's plan is that-- because it raises taxes so drastically on certain people-- it fundamentally weakens broad political support for Social Security, something "adults" in the Democratic Party would probably never let happen.

The clock is still ticking:


Tune into WILLisms.com each Thursday or so for more important graphical data supporting Social Security reform.

--------------------------------

Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).
-Week Twenty-Four (KidSave Accounts).
-Week Twenty-Five (Latinos and Social Security).
-Week Twenty-Six (AmeriSave).
-Week Twenty-Seven (Cost Of Doing Nothing).
-Week Twenty-Eight (Chile).
-Week Twenty-Nine (Entitlement Spending Out Of Control).
-Week Thirty (Reform Better Deal Than Status Quo).
-Week Thirty-One (Social Security As A Labor Cost).
-Week Thirty-Two (Social Security And Dependence On Government).
-Week Thirty-Three (Social Security, Currently A Bad Deal For African-Americans).
-Week Thirty-Four (Longer Life Expectancies Straining Social Security).
-Week Thirty-Five (Howard Dean & Salami).
-Week Thirty-Six (Growing Numbers of Beneficiaries Draining Social Security).
-Week Thirty-Seven (The Crisis Is Now).
-Week Thirty-Eight (Disability Benefits).
-Week Thirty-Nine (Broken Benefit Calculation Formula).
-Week Forty (German Social Security Disaster).
-Week Forty-One (Crumbling Pyramid Scheme).
-Week Forty-Two (Overpromising, Globally).
-Week Forty-Three (Demographic Wave).
-Week Forty-Four (The Jerk Store).
-Week Forty-Five (Defined Benefit Plans).
-Week Forty-Six (Even The Empty Promises Are A Bad Deal).
-Week Forty-Seven (Our Aging Population).
-Week Forty-Eight (The Tax Increases Required To Cover Social Security's Costs).
-Week Forty-Nine (Much Longer To Get Your Money Back From Social Security).
-Week Fifty (A Vote, At Last).
-Week Fifty-One (We Can Do Better).
-Week Fifty-Two (Socialist Security).
-Week Fifty-Three (China Has The Same Problem, Only Worse).
-Week Fifty-Four (Potential Crisis Size).
-Week Fifty-Five (The Crisis Moves Closer).
-Week Fifty-Six (Big Brother Social Security).
-Week Fifty-Seven (Personal Accounts Are Awesome).
-Week Fifty-Eight (Private Accounts and Presidential Proposals).
-Week Fifty-Nine (The False Promises Of Social Security = Unwise Investing/Saving).
-Week Sixty (Declining Rate Of Return).
-Week Sixty-One (Entitlement Spending Threatens America's Defense Capabilities).
-Week Sixty-Two (Dismal Rates Of Return Only Getting Worse).
-Week Sixty-Three (Lost Time, Growing Shortfall).
-Week Sixty-Four (Solutions & Consequences).
-Week Sixty-Five (Totalization Agreements).
-Week Sixty-Six (The 7.65% Solution).
-Week Sixty-Seven (No Reform Means The End Of Many Federal Agencies Or, More Likely, Higher Taxes).
-Week Sixty-Eight (Our Next President Faces Serious Social Security Challenges).
-Week Sixty-Nine (Taxing Social Security Benefits).
-Week Seventy (Democrats Just Want Higher Taxes).
-Week Seventy-One (Max Baucus = Thief).
-Week Seventy-Two (Social Security's Proportion Of The Federal Budget).
-Week Seventy-Three (America Becomes Junk Bonder Without Social Security Fix).

Posted by Will Franklin · 13 March 2008 11:58 PM

Comments

SOCIALISM, Loud and Clear is what Obama is all about. After hearing his Pastor screaming Racism hopefully Obama fans will rethink their vote on election day...

Posted by: ZsaZsa at March 14, 2008 10:50 AM

Will -- Thanks for highlighting my piece in the Journal. If you're interested (I mean, really interested) in Social Security stuff, I've started a reform blog at http://andrewgbiggs.blogspot.com. It's pretty wonky stuff, but might be interesting for people who really like to get down in the weeds. Best, Andrew Biggs

Posted by: Andrew Biggs at March 14, 2008 12:16 PM