Monday, June 30, 2008

Wash Post Blog: Obama Campaign “Clarifies” Social Security plan

Glenn Kessler reports on the Washington Post's political blog that the Obama campaign provided additional details regarding Sen. Obama's proposals for Social Security. Here's the news, such as it is, then some notes:

Sen. Barack Obama today plans to make a firm commitment to a Social Security tax hike on people making more than $250,000 a year, stepping away from an earlier plan he floated last year to boost the 12.4 percent payroll tax on all workers as a way of extending the program's solvency.

Taxes to fund Social Security end once a worker makes more than $102,000 this year, a ceiling that is indexed to inflation. Workers and employees share the cost, with each contributing 6.2 percent. Under Obama's plan, which the presumptive Democratic nominee will discuss this afternoon at a retirement community here, there would be a "doughnut" between $102,000 and $250,000 when no taxes are paid, according to a campaign adviser who asked not to be identified. But then new taxes would be imposed on people making more than $250,000.

While Obama has discussed the doughnut concept before, the adviser said there has been some confusion about his position and the campaign wanted to make it clear that he was embracing this option and setting aside the idea of boosting the payroll tax on everyone. The ceiling on the Medicare tax was lifted as part of former President Clinton's budget bill in 1993, but the Social Security tax has been much more politically sensitive.

In prepared remarks the campaign distributed to reporters, Obama plans to say that such an increase "can extend the promise of Social Security without shifting the burden on to seniors" while leaving "absolutely no change" in taxes for 97 percent of Americans."The best way forward is to adjust the cap on the payroll tax so that people like me pay a little bit more and people in need are protected," Obama plans to say.

Obama also plans to tweak Sen. John McCain, the presumptive Republican nominee, for having once expressed interest in a payroll tax hike and for denying ever having supported President Bush's plan to create private investment accounts for retirees.

The Obama campaign adviser said "such a change would likely be gradual, either phased in over time, implemented with a delay, or both." He also said there are various ways the plan could be implemented, such as with or without crediting the extra taxes toward benefits, lowering the tax rate at higher wage levels, and extending the income base beyond the payroll tax.

Fully eliminating the payroll tax cap would provide more than enough income to keep Social Security solvent for more than 75 years; Obama's current proposal would fall short of that goal, the adviser acknowledged.

Social Security is currently running a surplus, which is being used to help reduce the annual budget deficit. While Social Security receives Treasury bonds in exchange for those payments, eventually those bonds must be redeemed by the U.S. government, putting further strain on the federal budget as the baby boom generation begins to retire and the pool of workers needed to finance Social Security payments begins to shrink.

My thoughts: I'm not sure what this tells us that Jason Furman's letter to the Wall Street Journal didn't, and I'm quite certain I know less about Obama's Social Security plan than I did before these clarifying remarks were added. We know, as we did before, that workers earning over $250,000 would pay more in taxes. We also know that Sen. Obama is "setting aside the idea of boosting the payroll tax on everyone," but then we had no reason to believe he wanted to raise the 12.4% payroll tax rate since he'd never mentioned it before and has, if I'm remembering right, previously ruled it out.

What we still don't know is a) what the rate would be; b) whether additional benefits would be paid on the additional taxes, and c) whether taxes would be levied on income other than earnings, as Social Security has traditionally done. I'll try to provide some measuring stick information on questions a) and b) to give at least a rough idea how much a given increment of taxes, with or without benefits, would do for system financing.

Update: Given all the above, and given Jason's reference in the WSJ to Sen. Lindsey Graham's draft reform plan from a couple years ago, my best guess is that they'd be looking at a surtax above the cap on which no benefits would be paid. It's much simpler than taxing non-wage earnings, and doesn't complicate things by paying extra benefits later. It was a provision contained in the Diamond-Orszag plan so they could claim bipartisan support, I guess.

Some quick numbers run with the GEMINI Social Security model: a 3% surtax above $250,000 implemented beginning in 2015 would improve the 75-year actuarial deficit (currently around 1.7% of payroll) by around 20 basis points and would add maybe 5 years to trust fund solvency. If they go to a 6% surtax – say, 3% each on employers and employees – then you can roughly double the improvement in the actuarial balance. I don't think the trust fund effect is linear, but that's not as important in any case.


Anonymous said...

"It was a provision contained in the Diamond-Orszag plan so they could claim bipartisan support, I guess."

How would that make it bipartisan?

Andrew G. Biggs said...

Because a similar provision was included in a draft plan from Lindsey Graham, a Republican. That provision differed, though, in that revenues from the surtax were used to fund personal accounts, not paid into the trust fund. From a practical standpoint I think that's a relevant difference, but I'm not sure Obama's folks would.

Bruce Webb said...

I found the "people like me" comment kind of amusing. Unless the cap increase is extended to non-wage income Obama would not in fact be exposed to extra tax, his wage income and perhaps not coincidentally that of every other Senator or Congressman falls right in the middle of that donut hole ($169,000 for rank and file up to $217,400 for the Speaker). And while I see reports that Michelle made $273,000 in 2006, I doubt that the hospital would have continued paying her once she hit the campaign trail full time, in fact I am not sure that would even have been legal under campaign finance laws. Since FICA is applied to individual and not household income and at that restricted to wages it doesn't look like the Obamas would in fact face any extra tax liability.

So is Obama being cynical? Or are there really plans to extend the tax to non-wage income? Or does he simply not understand the current financial structure of SS? Well we just don't know. The worrying thing is that it is not clear to me that Furman or Goolsbee know, the whole thing has a feel-good air about it designed to attract progressives who (like me) are always open to restoring progressivity to the tax system but who may not be willing to get down into the details. Which is pretty easy when there are no details.

I have spent endless time explaining to other progressives why a cap increase that seems progressive in principle can end up regressive in practice simply because its incidence is currently restricted to wages. But all they hear is "tax wealthy people like me" pandering and they start salivating over the prospective free lunch. When in reality all they are truly getting at this point is a smell of the sizzle, the size and even existence of the steak being totally theoretical at this point.