Mickey Kaus on the Obama Donut Hole and Social Security “Welfare”

Mickey Kaus – one of my favorite bloggers and a strong proponent of welfare reform – takes on the question of whether Senator Obama's plan to eliminate the wage cap on the Social Security payroll tax would turn the program into "welfare." (His comments came in response to a post by National Review's Ramesh Ponnuru.)

Kaus's answer: no. The Social Security "work test" – if you don't work, you don't receive benefits – will retain the "earned benefit" component even if overall ratio of taxes to benefits becomes far more progressive.

My answer: maybe. In addition to lifting the payroll tax ceiling, Obama has proposed a tax credit to effectively refund payroll taxes to low earners, despite the fact that the EITC was designed to do pretty much the same thing. Clearly, the program under a President Obama would be far more progressive than it currently is. This isn't inconsistent -- while Democrats generally oppose excessive progressivity on the benefit side, arguing that a 'program for the poor is a poor program', they generally favor increased progressivity on the tax side. In any event, would the "work test" keep a more progressive Social Security program from being seen as welfare? Well, does a work test keep the EITC from being seen as welfare? Probably not, though the EITC has fared much better than welfare programs without a work test. This is more of a sliding scale than a yes/no question; whether the Obama plan pushes Social Security over the line isn't clear, but it clearly moves the program more toward the welfare end of the spectrum.

Kaus asks one other interesting question: Why does Obama propose raising taxes on the rich when he could just as easily get that money by reducing their benefits through a means-test? (Kaus's long-favorite reform policy.) This question was implicitly answered, from a Republican perspective at least, in President Bush's proposed reforms: higher income people care more about their taxes than their benefits, even if they're equal in present value, so it's more acceptable to them to cut their benefits than raise their taxes. My answer to Kaus's question is that there's a limit to how much you can cut the rich's benefits – after all, the maximum benefit paid to a new retiree this year is around $25,000 – while there's pretty much no limit to how much you can raise the rich's taxes. A person earning $500,000 would pay an extra $31,000 each year in payroll taxes under the Obama plan (it's unclear whether he would receive extra benefits for those taxes). So in addition to a general inclination to push progressivity more in terms of taxes than benefits, there may be a practical consideration here as well.