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. 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.
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.
Monday, June 30, 2008
Wash Post Blog: Obama Campaign “Clarifies” Social Security plan
Auto-IRAs in the news
The Politico Take the much-heralded "Auto-IRA" proposal, which could help head off the fiscal train wreck of tens of millions of Americans being unable to afford retirement. Scholars David John and Mark Iwry, who have pioneered the proposal, come from opposite sides of the ideological spectrum: John is a senior research fellow at the Heritage Foundation; Iwry, a senior fellow at the Brookings Institution. Check out the Retirement Security Project for more details. My take is that auto-enrollment IRAs are both good policy and a potential way around the "add on" versus "carve out" personal account debate that has made progress on Social Security reform difficult over the past several years.
reports on automatic-enrollment plans for IRAs being pitched by the ideological odd-couple of the Brookings Institution's Mark Iwry and the Heritage Foundation's David John. The highlights:
In 2005, John and Iwry were on opposing sides of the debate over President Bush's proposal to incorporate personal retirement accounts into Social Security. John was one of Bush's most influential advisers on the plan, and Iwry was one of its many critics. Bush's Social Security overhaul crashed and burned. In the aftermath, John and Iwry were speaking together on a policy panel and heard their views converge on what else the government might do about the sad state of Americans' retirement savings.
The pair got together and, after about a year of work, their first paper on an automatic IRA program was born on Valentine's Day 2006.
The gist of their mandate for businesses that don't offer any retirement benefits: Employers above a certain threshold, perhaps 10 employees, would set up a system for employees to automatically enroll and make payroll contributions to an IRA — a tax-favored individual retirement account that's the personal version of a 401(k). Employers would get a tax credit to compensate for administrative costs, and employees could opt out.
The benefit, supporters say, is that many more of the 75 million working Americans without workplace retirement plans — nearly half of all workers — would start saving. And taxpayers wouldn't have to step in at a later date to support throngs of impoverished seniors.
Sunday, June 29, 2008
New York Times on the challenge of lower fertility
The New York Times Magazine has an interesting story on how low fertility is impacting Europe and how governments are beginning to respond. A few points stand out: The whole story is well worth reading.
Friday, June 27, 2008
Top 6 Myths About Social Security Benefits
Rich White at Investopedia.com has a nice list of the top 6 myths about Social Security benefits. The whole article is worth reading, but here's the quick list: A couple quick thoughts on two myths. I totally agree with Myth 2 that using a "break even" approach to choosing when to retire is the wrong way to think about things. It might be an easy way to make a decision – almost always, people seem to conclude that they're better off claiming benefits ASAP – but ignores the fact that life spans are highly uncertain and delaying claiming gives you a larger annuity payment that is designed explicitly to handle those uncertainties. Don't worry about breaking even, worry about having enough money to get by on when you're old. Second, I disagree somewhat with Rich's treatment of Myth 4, that if you keep working and paying taxes you won't earn more benefits. He's of course technically correct, in that SSA recalculates your benefits each year and will increase them if new earnings enter in to the benefit formula. But in a paper presented at the APPAM conference last year, David Weaver, Gayle Reznick and I looked into how much most people would receive in extra benefits if they decided to work an extra year. The short story is: not much. The median marginal return for an additional year of work was -17%; another way of putting it is that the typical person would receive back only around 9 cents of benefits for each additional dollar of taxes they paid. This is due to a number of factors, including spousal benefits, the progressive benefit formula, the 35 year limit on earnings included in the benefit formula, etc. My favorite way of dealing with this would be to reduce or eliminate the payroll tax at a given age, such as 62. This would give a direct incentive for individuals to remain in the workforce, and would do so in an easily understandable way.
Video of Technical Panel forum available online
Audio and video of the June 13th American Enterprise Institute event regarding the report of the 2007 Technical Panel on Assumptions and Methods is available online here. Powerpoints are also available at the same link. The video includes some interesting discussion and is worth watching for the wonky.
Thursday, June 26, 2008
Treasury Department releases Social Security issue brief
The Treasury Department released the fifth in its series of issue briefs on Social Security. The latest, entitled "Social Security Reform: Strategies for Progressive Benefit Adjustments," makes the case for progressive price indexing of future benefits, a strategy that combines wage indexing of benefits for lower-earning individuals with price indexing of benefits for individuals earning the maximum taxable wage. Here's how the new brief concludes: There is widespread agreement that any reform to Social Security will involve adjustments to reduce benefits relative to what is currently scheduled but unpayable, and that these adjustments will fall relatively more heavily on high-income workers. There is likewise a consensus that workers with low lifetime earnings will be shielded from the burden of reform. While there are many ways to implement progressive benefit adjustments of this sort, the essential mechanics of any benefit adjustment are the same. In some proposals these mechanics are obvious because they make specific adjustments to the parameters of the benefit formula. It is less obvious—but no less true—for reform proposals such as progressive price indexing, where adjustments to the parameters of the benefit formula are tied changes to to economic variables such as wage and price growth. While progressive benefit adjustments will represent an important component of some future reform plan, they are unlikely to be the entire plan—that is, progressive adjustments to benefits will be combined with other reforms. Because these other reforms can also influence Social Security's overall progressivity, a meaningful assessment of the effect that proposed changes to benefits would have on Social Security's fairness across and within generations will need to specify those additional reforms.
Obama campaign responds on Social Security
In today's Wall Street Journal, Obama campaign economic director Jason Furman responds to Larry Lindsey's recent op-ed on the Obama Social Security proposal: There is much to disagree with in Larry Lindsey's June 20 op-ed, "Obama Turns FDR Upside Down." Barack Obama's proposal to extend the life of Social Security is fully consistent with the spirit of Social Security, just as the elimination of the payroll tax cap for Medicare has not undermined support for that program. Mr. Obama's proposal would also help to restore long-run fiscal balance, contributing to a strong and growing economy. It is modeled on a proposal floated by Sen. Lindsey Graham -- a proposal that John McCain publicly said he could support. More important, Mr. Lindsey is wrong about Sen. Obama's policy on the payroll tax. Mr. Obama has stated that he would like to extend solvency while protecting middle-class families and asking those making over $250,000 to pay their fair share. As president, he would work with Congress on a bipartisan basis to design the details of such a change, including the tax rate, how it is phased in over time, the linkage between these tax payments and benefits and other critical design elements of this plan. He has not proposed a 12.4-percentage point tax increase on earnings above $250,000. As I've said before, it makes little sense from a policy standpoint to propose eliminating the payroll tax cap with a donut hole between $100,000-$250,000 without first specifying the tax rate above the current cap, whether extra benefits would be paid, whether the tax would be applied to singles or couples, etc., since the effects of the proposal can differ a great deal based on how these questions are answered. It seems far more likely to me that the original proposal was designed simply to protect Sen. Obama from criticism from the Democratic base for having called Social Security a "crisis" and saying that all policy options should be on the table. Having accomplished that, at least sufficiently to win the nomination, the tax increase is now a liability for the general election and is being pushed overboard with as much plausibility as the campaign can muster.
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