Thursday, August 14, 2008

Tax Policy Center Blog on Obama's Empty Social Security Fix

Ouch. I thought I'd been tough on Sen. Obama's Social Security reform plan. But Howard Gleckman, writing for the Tax Policy center's TaxVox blog, really sticks it to him today.

The thing about a donut hole is that it is empty. There is nothing. And that, it seems, is what is left of Barack Obama's plan to fix Social Security.

The Obama people now tell us that his proposal, which is built on a tax hike for those earning more than $250,000, won't take effect until at least 2018. You heard right: 2018.

That would not be in Obama's first term. It would not be in his second term. It would not happen until two years after his successor is elected, even if he serves a full 8 years. It would also, conveniently, be outside the budget window, allowing Obama to scale back the official size of his proposed tax hike for the wealthy.

Do the political math. Take the likelihood of any politician keeping any given promise. Discount for the time he says it will take to fulfill that pledge. Then discount it again if the effective date is scheduled for roughly the time of his post-Presidential book tour. The credibility factor is infinitesimally low. It is as if George Bush had promised in 2003 that he'd withdraw from Iraq in 2013.

Make no mistake, what Obama is really saying is that, at least for the campaign, he is walking away from Social Security and all of its problems.

Click here to read the whole post.

I'd noted the reduced improvement to system financing from putting off the tax increase for a few more years, but Gleckman hits on a further political dynamic. But Obama's folks have a viable defense, if they want to make it: most people on both sides agree that the Social Security trust fund hasn't been too effective at actually increasing saving. (Click here to read why.) If so, it doesn't make much sense to increase taxes before 2017, when the system is projected to start running deficits. Otherwise, we'd simply be putting more cookies in the cookie jar for Congress to spend. If Obama made that argument I think most people would find it plausible. The problem is that once you acknowledge the trust fund isn't "real" saving, the Social Security problem looks a lot bigger and a lot closer, and solutions for prefunding move more toward personal accounts. I don't think Obama wants to admit either of those right away.


Jim Glass said...

Oh, I think he was kind of easy on Obama.

Social Security faces a "crisis". Lift the cap on the payroll tax on the rich! ... well, 2 to 4 points of the payroll tax ... well, after my presumptive second term is over.

Too many brazen flip-flops like this could hurt the guy.

The NY Daily News ran a big, most-of-the-page picture of Obama yesterday under a big headline: "Mr Flip Flop". It was about him wearing flip-flop sandals at the beach ... but you had to read the story to get that ... and that the idea even occurred to the editors shows he is getting near to somewhere he doesn't want to be.

Yesterday his people ran an op-ed in the WSJ emphasizing that Obama plans to cut taxes on net, with his tax increases on the over-$250k set more than offset by cuts for everybody else. They compared him to Reagan on taxes, approvingly, twice.

OK ... but where is the money for his universal health care program going to come from then?

Krugman already asked this in his column once, and that was when he thought Obama was raising taxes, just by not nearly enough -- not when Obama's people were promising to outright cut them.

So either univeral health care has become free, or Obama is throwing it overboard, or his people aren't being entirely forthright -- which would be very "old style" politics of them.

If he really wants to avoid becoming pegged as Mr Flip Flop for good, sooner or later he's going to have to find an issue that he believes is worth paying a price for, and pay it.

Or he may find a lot more Howard Gleckmans out there sticking it to him.

Jim Glass said...

But Obama's folks have a viable defense, if they want to make it...

The problem is that once you acknowledge the trust fund isn't "real" saving, the Social Security problem looks a lot bigger and a lot closer...

If Obama's folks came out seriously with that argument, Hillary would get nominated at the convention. No joke.

If they were to wait until after the convention to come out seriously with that argument ... oh, I'd love to see the effect on the Democratic establishment and netroots and all.

I've never actually seen a big fat hornets' nest get whacked good and hard with a stick.

Bruce Webb said...

"The problem is that once you acknowledge the trust fund isn't "real" saving, the Social Security problem looks a lot bigger and a lot closer, and solutions for prefunding move more toward personal accounts."

Well I don't see that the latter actually follows. The not so invisible elephant in the room is transition cost to a PRA based system compared to a tax based solution that would keep Social Security whole as is. I can concede that Andrew is right and that Intermediate Cost is in fact right when he concludes (from the Census post above) "But this does reinforce my view that the Trustees' underlying assumptions are at least reasonable." But this still leaves him stuck on a data fork. If we agree that the OACT has in fact properly identified the problem we have to equally conclude they have correctly calculated the tax-based solution which is to say 1.7% of payroll.

A PRA proposal that starts from the position of Add-On is a current year tax increase. That some or all of that additional tax is in some sense yours in a way that the scheduled benefit from an equivalent straight tax increase to maintain traditional Social Security whole is not is really a philosophical argument. Unless of course you can show a better return from a PRA than the simple 1.7% tax increase would produce. So far I have not seen a plan that produces that. Which leaves proponents with the task of selling workers on the importance of 'Sustainable Solvency' even if it means sacrifice of their own material interests in the meantime. Good luck with the 'Shared Sacrifice for Thee but not for Me' argument.

Okay what if we drop Add On in favor of Carve Out? Well you get the same problem only time shifted somewhat. Carve Out simply brings forward the date the TF faces Shortfall and then Depletion. Which means either cutting the benefit schedule or increasing the current year transfer from the GF to the SS TF. Now while in theory this cash gap can be backfilled by a combination of benefit cuts, current year tax increases, simple borrowing, or offsetting cuts in discretionary spending, it all ends up being the equivalent of a net tax increase for someone sometime.

TANSTAAFL. There is No Such Thing as a Free Lunch: not just a pet phrase for Libertarians, it is in fact the challenge for proponents of PRAs. 'Whose Ox gets Gored? and When?' and 'Cui Bono?' Like it or not those two questions are hanging over the debate.