More on Obama Social Security Plan

Senator Barack Obama fleshed out a few details on his Social Security plan over the past several days, prompting increased press coverage and commentary.

One specific nugget was that Obama's plan would apply the payroll tax to earnings above $250,000, while in the past he had been vaguer and stated that the top end of his "donut hole" would lie between $200,000 and $250,000. This alters somewhat the numbers I produced for the Wall Street Journal piece a while back. In that case, I had assumed the donut hole extended from $100,000 to only $200,000, with a 10-year phase in. At that time, I'd projected that his plan would eliminate around 43% of the 75-year deficit; with the higher $250,000 cap, that falls to around 36%. The total improvement would actually be smaller than that, as Sen. Obama has also proposed eliminating income taxes on seniors earning under $50,000; since most of these would be taxes levied on Social Security benefits, which by law flow back to Social Security, this would increase the Social Security shortfall by around 10%. In addition, Obama has proposed eliminating payroll taxes for individuals earning $8,000 or less. I haven't yet worked out an estimate on this, but it would also reduce the gains from the expansion of the payroll tax cap.

The Tax Policy Center blog has a good discussion of Sen. Obama's proposal, as does EconomistMom. The TPC notes that the Obama campaign is being vague on the details of the plan, so far not disclosing whether benefits would be paid upon the additional contributions (consistent with Social Security's history, I've assumed they would be) or even whether the tax rate above the donut hole would be the same 12.4% levied on earnings up to $102,000. Both TPC and EconomistMom note that Obama's plan is complex, and TPC points out that by targeting it on a very small chunk of the population it significantly increases marginal tax rates and thus raises incentives to hide income.