Thursday, August 21, 2008

Hubbard: We Can't Tax Our Way Out of the Entitlement Crisis

Columbia University professor Glenn Hubbard has an op-ed in today's Wall Street Journal regarding Sen. Obama's plans for entitlement reform. Here are the highlights with regard to Social Security reform:

In their op-ed on this page, Obama economic advisers Jason Furman and Austan Goolsbee noted that taxpayers whose incomes exceeded $250,000 would face an additional Social Security payroll tax increase of four percentage points (in addition to a five-percentage-point increase in the top marginal income tax rate). This new payroll tax plan would affect the top 3% of earners.

The new payroll tax hike is more modest than the one Mr. Obama hinted at last fall, which might have uncapped the payroll tax entirely. But it would also do very little to shore up Social Security, since it means that no more than 15% of Social Security's long-term funding gap would be closed. Thus, if Mr. Obama is indeed opposed to reductions in Social Security spending growth, he is necessarily committed to large future payroll-tax or general income-tax increases.

This last is a point I've probably overstressed: Obama's proposed tax increase isn't sufficient to honor his promises not to reduce benefits or raise the retirement age, meaning that other even larger tax increases would be needed.

1 comment:

Bruce Webb said...

If the Obama an as modified only fills a third of the current payroll gap (Biggs) or 15% (Hubbard) we are left with a remnant gap of around 1,1% (B) or 1.5% (H). Even if you apply 100% of the incidence of the tax to the worker these just not scary numbers.

I oppose cap increases on both policy and politic grounds but they do serve to carve the gap down to digestible chunks and so undermine the case for privatization. Partial fixes lower the urgency level and so for supporters of traditional Social Security sort of a two edged sword. Improved solvency good. Departure from insurance model bad.

For example I don't know if Fred Thompson understood that benefit cuts on the order he proposed (on Baker's scoring) gutted the case for PRAs. In SS geek talk 'programatic solvency' is the enemy of 'sustainable solvency'.