Friday, May 23, 2008

Obama discusses Social Security reform

Here's Barack Obama in Gresham, Oregon discussing Social Security reform, both his own ideas and criticism of Sen. McCain:

Obama says that a first priority is to stop spending the Social Security surplus, which implies balancing the non-Social Security "on-budget."

Second, he opposes any changes such as increasing the normal retirement age or reducing annual cost of living increases, because he believes his own plan -- eliminating the payroll tax ceiling, with a "donut hole" between the current ceiling of $102,000 and around $250,000 -- will be sufficient.

Obama proposes eliminating income taxes on Social Security benefits for individuals earning less than $50,000 in retirement. Obama says this will benefit around 7 million people, at an average of $1,400 per person. As this income tax revenue currently flows to Social Security, this will reduce the program's solvency. (While I don't know the source of his numbers, taking him at his word this would cost around $9.8 billion annually -- a lot of money, though relatively small on Social Security's scale.)

Obama also discusses his plan to automatically enroll individuals in workplace defined contribution pension plans. This is a very good idea, with bipartisan support. (See this proposal from the Retirement Security Project at the Brookings Institution.)

Update: A friend emails: "I guess Obama is unconcerned about generational equity. He wants to reduce taxes on people already getting the best deal (current retirees) and increase them on the generations already getting the worst deal (current workers)."

Me: Hard to deny that's the net result Sen. Obama's policies. To a large degree, Social Security is all about spreading cost burdens over time; making Social Security an even better deal for current retirees will require larger tax increases or benefit reductions on future participants. It's not clear why that's justified on either a policy or a moral basis, though electorally it's got an obvious appeal.


Bruce Webb said...

Interestingly the 'donut hole' proposal is the exact opposite of that in Obama advisor Liebman's LMS plan where the entire incidence of the cap increase falls right into that donut hole.

But I have to wonder how many people earning more than $250,000 a year have much of that income potentially exposed to FICA to start with? If I were a corporation faced with having to pay 6.2% as an employer match plus having to perhaps increase base pay to compensate for the executive's 6.2% it would take perhaps a nanosecond to decide that I needed to restructure compensation packages so that they showed as returns on capital rather than wage income. After all that is the model for the top levels now. Beyond slapping a big bill on movie actors and sports stars this seems to be little more than create a bonanza for tax lawyers and compensation consultants. Obama seems not to have given a thought as to where the real incidence of FICA hits. That is Steve Jobs pays himself a salary of $1 a year and so is going to have a really crappy Social Security check. Which probably doesn't keep him up awake many nights.

And while I don't have a lot of problem with opt-out automatic enroll plans, it seems odd to me that conservatives only concern themselves with this narrow piece of the economic justice pie, we need to force people to save while we have no responsibility to ensure they have health care in the here and now. Its odd. Not inexplicable mind you, I have some perfectly fine explanations, but on the surface quite odd indeed.

Andrew G. Biggs said...

I discussed some of these issues in the longer version of the Wall Street Journal piece on Obama's plan. (Available here:,pubID.27704/pub_detail.asp)

The fact that Obama's plan differs so much from Liebman's may tell you something. It tells me that his plan was more geared toward heading off political pressure from the left, which was angered by him saying Social Security reform was important, than to a long-term policy position. But that's just my impression.

Certainly once you get to very high earners, capital gains and other forms of income play a bigger role relative to wages. The area Obama holds harmless -- from $100k to $250k -- has a LOT of wage earnings in it, which is one reason his plan only fixes around half the 75-year shortfall. I don't know how he gets around this problem, since he criticizes other reforms such as raising the retirement age, fixing the CPI, etc.

Among those who do have wage earnings subject to the new payroll tax, the incentives to avoid it would be very large. In the paper I cited John Edwards' use of a chapter S corporation to avoid the Medicare payroll tax (2.9%). Add another 12.4% and the incentive are pretty large to alter how people are compensated.

In Liebman's paper on raising the tax max, he estimated that the net revenue gains would only be around 50% of the gross, due to behavioral effects and reductions in wages by employers to cover their own increased obligations. While it's hard to gauge how much evasion there would be, even with modest amounts the net revenue gains from eliminating the tax max aren't huge.

Bruce Webb said...

Andrew I plan a new post on LMS as it relates to solvency and 'crisis' for tomorrow morning at AB around noon Pacific. I gave Prof Samwick a heads up, if your schedule allows a weigh in then of course it would be welcome.

Anonymous said...


i hope Biggs is right and Obama is merely playing to his base.

Because raising the cap would be about as stupid as any other change in Soc Sec right now.