Thursday, May 29, 2008

A Social Security pander from Obama

I know that much of my published work seems to be picking on Barack Obama (see here and here…). This isn't really intentional – the vast majority of what I'm working on has nothing to do with the candidates or the election. Nevertheless, things continue to pop up…

The latest Social Security-related proposal from Sen. Obama is to exempt any senior earning less than $50,000 from income taxes. His campaign claims this would save 7 million retirees an average of $1,400 per year.

Why is an exemption from income taxes a Social Security proposal? Because most income tax revenues from lower income seniors are from income taxes levied on their Social Security benefits, and under law those income tax revenues go back to Social Security to help keep the system solvent for the future. In other words, this income tax cut for seniors would be paid for largely out of Social Security money.

How much would it affect Social Security? This is very ballpark, but $1,400 times 7 million equals $9.8 billion per year in lost income tax revenues per year. Let's assume that all of that would otherwise flow to Social Security. The total payroll tax base in 2008 is estimated by the Trustees at $5.567 trillion, so a reduction of $9.8 billion is equal to around 0.18% of payroll. Assuming this ratio remains constant in coming years, the income tax reduction for seniors would increase Social Security's 75-year shortfall of 1.7% of payroll by around 10%.

To me, that seems a bit much for what's pretty clearly an election-year pander to a voting group – older voters – that Obama has a distinct weakness with. According to Gallup, McCain leads Obama among older voters by 51% to 35%, which almost matches Obama's 57%-37% lead among individuals aged 18-29 and would certainly more than match Obama's advantage among young voters due to older folks far greater likelihood of voting. (According to the Census Bureau, individuals age 65 and over are twice as likely to vote as individuals age 18-24.)

I don't take particularly seriously any candidate's claim to be a "different kind of politician" – our problems with partisanship are basically a function of our political structures and the fact that neither party is currently dominant. But still, Senator Obama has placed a lot of emphasis on practicing "a new kind of politics" and this Social Security pander looks distinctly old school to me.

Granted, Senator Obama has proposed a tax change that would more than cover the cost of the tax cut for seniors. Obama would eliminate the current "cap" on the 12.4 percent payroll tax, though with a "donut hole" exemption for workers earning between $102,000 and $250,000 per year. Phased in over 10 years, my estimate is that this would fix around 36% of the 75-year shortfall, though at the cost of raising the top marginal tax rate on earned income from around 37.9% – 35% income taxes and 2.9% Medicare taxes – to over 50%.

Whatever the merits of the Obama proposal, after netting out the tax cut for seniors Obama's plan would fix only around one-quarter of the long-term shortfall. To his credit, Obama has taken the Social Security problem seriously, at least in rhetoric. As the campaign has progressed, though, his policy seems less and less serious on the issue.


Anonymous said...

once again I have to agree with Biggs.

the tax cut is pandering and it is a bad idea.

but is pandering to the poor really so much worse than pandering to the very very rich?

Social Security is off budget and needs to remain so. It can pay for itself through any forseeable circumstances.


Andrew Biggs said...

I understand. Though note that this isn't well targeted on the truly poor, since their benefits would be low enough not to be subject to income taxes and they wouldn't have much outside income. This is pretty much a middle class pander.

Arne said...

"things continue to pop up"
Perhaps the reason more things pop up from Obama is addressed in your Tuesday post, where (Jed Graham?) wrote regarding McCain "He has yet to offer details."

Anonymous said...

well, tom friedman was brilliant today. he wants a gas tax, offset by a reduction in the payroll tax for everyone under 80k.

this would destroy soc sec about as effectively as the bush privatization.

it's not the pander that gets me. it's the stupidity.

social security: the "if all else fails" retirement savings of workers is apparently a big enough pile of money that every money-lecher of every political stripe is scheming to get her alone in the dark... if you'll pardon the metaphor shift.

and the workers are too dumb to just say no.


Anonymous said...

Just so we all understand, calling for tax cuts is pandering, right? I'd like to keep that in mind as we go froward with this campaign.

Andrew, would you like to take the opportunity then to take McCain to task for all his pandering?

Just a clue. New politics does not mean not enacting policies that would help a broad swath of voters. It does mean not enacting policies that effect a very narrow group of voters because said voters pony up contributions at election time. It's not that hard to understand.

New politics means not lying about the consequences of your proposals. I'm sure if you ask him, Obama will admit that cutting taxes on SS will cost money that has to be made up elsewhere. I doubt he will tell you that the provision sunsets in 10 years so does not affect long-term financing.

There are numerous instances in this campaign where Obama has been very straightforward about the cost of his proposals or the sacrifices that will be needed
--gas tax, cap and trade, come to mind.

Andrew, keeps saying Obama's proposals do not close the entire financing gap. Has he claimed that it does? Or has he just said this is what he favors as the first step? what do they call that..incremental?

If he claims eliminating the cap with a donut, plus cutting taxes on seniors results in sustainable solvency give me a call. I doubt he will ever say that.

Andrew Biggs said...

Some thoughts on the final anonymous:

First, not all tax cuts are pandering, though I generally oppose tax cuts that aren't 'paid for' with reduced spending. McCain claims his will be, though I'm not an expert on his budget plans.

Second, you define 'new politics' in such a way that it makes Obama's policy look better. I'm not sure most people would put such a restrictive definition on 'new politics.' When Congress raised benefits in the past it was honest about it, but I still don't think that made it particularly responsible policy.

Third, Obama has said that his plan to raise the payroll tax ceiling means we won't have to raise the retirement age, reduce COLAs, etc. That certainly implies that he sees his tax increase as a more or less complete plan.