Estimated financing effects of (potential) Obama proposal

Yesterday's Washington Post provided some additional details on Sen. Obama's proposals for Social Security. The campaign is looking at applying a tax of 2 to 4 percent total between employers and employees on earnings over $250,000. The campaign does not say whether additional benefits will be paid based on those taxes.

My educated guess is that it's highly improbable that additional benefits would be paid. If benefits were paid based on the current benefit formula the provision would lose money, simply because a 2-4 percent tax isn't sufficient to finance benefits even under the 15 percent replacement factor in the Social Security benefit formula. Moreover, even if additional earned benefits were scaled down, which is possible, the net savings to Social Security would be extremely small. So for these purposes, I'm assuming a 2-4 percent surtax on wages over $250,000, very similar to the surtax used in the Diamond-Orszag proposal from a few years back.

I've simulated a 4 percent surtax using the GEMINI microsimulation model developed by the Policy Simulation Group, assuming the tax increase is imposed as of 2015. Results are relative to the baseline estimates of the 2007 Trustees Report, which projected that Social Security would begin running cash deficits in 2017, face trust fund insolvency in 2041, and run a 75-year shortfall equal to 1.95 percent of taxable wages.

Compared to the 2007 baseline, a 4 percent surtax above $250,000 would delay cash deficits from 2017 to 2018, trust fund insolvency from 2041 to 2045, and reduce the 75-year deficit from 1.95 percent to 1.68 percent of payroll.

In the 2008 Social Security Trustees Report, the projected 75-year shortfall was reduced from 1.95 percent to 1.70 percent of payroll, principally based on changes in methodology for modeling the effects of immigration on system financing. Therefore, it can be expected that the 75-year shortfall under Sen. Obama's proposal would be lower than calculated above – somewhere in the range of 1.5 percent of payroll.

That said, even based on the reduced 2008 deficit, the Obama proposal would come nowhere close to restoring long-run solvency. Sen. Obama advertized his original plan as a means for avoiding benefit reductions or increases in the Social Security retirement age, but these calculations make clear that these steps would be needed in addition to the tax increase on individuals earning over $250,000. While these numbers are based only on educated speculation regarding the final form of Sen. Obama's proposal, it is unlikely the net results would differ significantly.