Taxes: Obama Wants Social Security to Be a Welfare Plan
October 28th, 2008 at 09:38pm Bob Trojan
From the Wall Street Journal:
Imagine this: Barack Obama proposes a Social Security payroll tax cut for low earners. Workers earning up to $8,000 per year would receive back the full 6.2% employee share of the 12.4% total payroll tax, up to $500 per year. Workers earning over $8,000 would receive $500 each, with this credit phasing out for individuals earning between $75,000 and $85,000.This tax cut would make an already progressive Social Security program even more redistributive. Under current law, a very low earner receives an inflation-adjusted return on his Social Security taxes of around 4%. That’s a good return, given that government bonds are projected to return less than 3% above inflation. A high-earning worker, on the other hand, receives only around a 1.5% rate of return. Under Sen. Obama’s proposal, returns for very low earners would rise to around 6% above inflation — about the same return as on stocks, except with none of the risk. Compounded over a lifetime’s contributions, the difference in the “deal” offered to workers of different earnings levels would be extreme.
While Social Security has always been progressive, many would say this plan goes too far and risks turning Social Security into a “welfare program.” Low earners receive more in benefits than they pay in taxes — meaning their “net tax” is already negative — and Mr. Obama’s plan would increase net subsidies from the program.
Moreover, this payroll tax cut plan would reduce Social Security’s tax revenues by around $710 billion over the next 10 years. If made permanent, the Obama tax cut would increase Social Security’s long-term deficit by almost 60% and push the program into insolvency in 2034, versus 2041 under current projections.
To fill the hole in Social Security’s finances, Mr. Obama would increase income taxes on high earners and pour that money into Social Security. This would be the first time that income tax revenues have been used to finance Social Security, which has always relied on its own dedicated payroll tax to differentiate itself from other government programs. Filling the gap with higher taxes on high earners would further increase Social Security’s progressivity, pushing it closer toward a welfare-program approach.
Now, you haven’t heard Mr. Obama describe anything like this plan. If you had, it’s likely you wouldn’t support it. But it’s almost exactly what his headline “tax cut” would do. The Obama campaign took the idea described above and made it much more complicated.
Under the plan, which he claims would cut taxes for 95% of Americans, provides an income tax credit worth 6.2% of earnings up to $8,000, for a maximum credit of $500 per worker or $1,000 per couple. The 6.2% figure is important, because it matches the employee share of the Social Security payroll tax. Because around a third of Americans currently pay no income taxes — a fraction that would rise to almost half under Mr. Obama’s plan, according to the Tax Policy Center — Mr. Obama’s tax credits would be refundable, meaning you could collect the credit even if you paid no income taxes.
While Mr. Obama calls his plan “Making Work Pay,” under standard economic assumptions his plan would actually discourage work for anyone earning over $8,000 per year. The tax credit itself would increase workers’ take-home pay, an “income effect” that reduces incentives to work. Moreover, for workers in the $75,000 to $85,000 income range, where the tax credit is phased out at five cents for each dollar of additional income, this would add five percentage points to their marginal tax rate.
So Mr. Obama has in essence proposed cutting Social Security taxes for low earners, which would shift the system toward a “welfare” approach and sharply increase its long-term deficit. To fill the funding gap, he will raise taxes on high earners and funnel the money into Social Security, making the system even more progressive and breaking a long tradition against funding Social Security with income taxes.
The complex way in which Mr. Obama structures and describes his plan would make it harder to administer than a straight payroll tax cut. But it is also more difficult for the typical American to understand. This may explain why he chose complexity over clarity.
Mr. Biggs is a resident scholar at the American Enterprise Institute in Washington, D.C. He blogs on Social Security policy at www.andrewgbiggs.blogspot.com.
Entry Filed under: People, Education & Training, Economy
2 Comments Add your own
1. rrichardson | October 28th, 2008 at 9:44 pm
More bad news today:
Obama Leads in Florida, Ohio, Must-Win Battlegrounds for McCain
By Catherine Dodge
Oct. 29 (Bloomberg) — Barack Obama leads in Florida and Ohio, states Republican John McCain must win to capture the presidency, as voters prefer the Democratic presidential nominee’s personal traits and approach on the economy and health care.
Obama, an Illinois senator, tops Arizona Senator McCain by 50 percent to 43 percent among likely voters in Florida, a Bloomberg/Los Angeles Times poll shows. He leads 49 percent to 40 percent in Ohio, as voters in the two states overwhelmingly rate domestic concerns as more important than national security.
Voters choose Obama, 47, as the candidate best able to handle the financial crisis and health care. And by an almost 2- to-1 margin, they say the Democrat has “the better temperament and personality to be president.”
“Domestic issues are the outstanding issues of the day, and Obama has been owning those,” says Susan Pinkus, the Los Angeles Times polling director. What is more, “voters are more comfortable with him” after his three debate performances.
Florida voters by more than 2-to-1 say a candidate’s views on domestic issues such as health care and the economy are more important than positions on the war in Iraq and terrorism; voters in Ohio say the same by a 3-to-1 margin.
Crucial States
No Republican has won the White House without capturing Ohio, and Florida helped George W. Bush obtain two terms in the White House. The current U.S. electoral map, polls show, indicates it would be almost impossible for McCain, 72, to win without carrying those two states.
In 2004, Bush won 286 Electoral College votes, including Ohio’s 20 and Florida’s 27. It takes 270 to win and if Massachusetts Senator John Kerry, the 2004 Democratic nominee, had won either of those states, he would have defeated the incumbent president.
Less than a week before the Nov. 4 election, Obama is running ahead in all the states that Kerry won, and is highly competitive in more than half a dozen states where Bush prevailed.
There’s also a gender gap in the Democrat’s favor. Among women voters in Florida, Obama leads 51 percent to 41 percent; in Ohio, his lead is 54 percent to 38 percent. Obama has a small lead among men in Florida, while McCain is slightly ahead with male voters in Ohio.
Temperament
In Florida, 58 percent of voters say Obama has a better temperament to be president, compared with 30 percent for McCain. In Ohio, Obama beats McCain on that question 57 percent to 29 percent.
“I find Obama to be pretty calm under any circumstance,” says poll respondent Donna Orcutt, 63, of Toledo, Ohio. “In the debates, some of the zingers he got he handled pretty good. If the object was to see if they could make him lose his temper, that didn’t happen.”
Orcutt, a Democrat who is retired and used to work for a house-cleaning company and as a secretary, says Obama has a better understanding of the economy because he didn’t grow up in a privileged environment. McCain, she says, “is a very nice man,” though he has never had to worry “about where the next paycheck is coming from.”
On the question of which candidate they trust to make the right decision about the economy, voters in Florida pick Obama over McCain by a 9-point margin, and in Ohio, the Democrat leads by 12 points.
Health Care
Obama does even better on the question of which candidate would better handle health care. In Florida, he is preferred by 52 percent of voters, compared with 34 percent for McCain; in Ohio, 54 percent pick Obama and 30 percent choose the Republican.
The Democrat also is ahead with white working-class voters, who overwhelmingly favored his opponent for the Democratic nomination, Senator Hillary Clinton of New York. Obama gets the support of 52 percent of these voters in Ohio, compared with 38 percent for McCain; in Florida, this group is almost evenly split, with a slight edge for Obama.
Even though Bush used victories in Ohio and Florida to build his winning coalition, more than seven in 10 voters in both states now disapprove of his job performance; more than eight in 10 say the country is on the wrong track.
Seventy percent of voters in Florida and 62 percent in Ohio say the recent troubles in the economy have hurt their family’s financial situation.
Change Agent
Ohio and Florida voters also say the ability to bring change to Washington — a central theme of Obama’s campaign — is more important than having the most experience, which is one of McCain’s selling points.
“I truly see Obama as someone who will come in with a less political and more intelligent problem-solving approach to really trying to address the critical problems,” says poll respondent Laurie Kadoch, 60, a Miami Democrat, who teaches at Florida International University College of Law.
Bush’s record is hurting McCain in Ohio, where more than half of voters say the Republican will continue the current administration’s policies. Voters also are split on that question in Florida.
As in previous polls, the bright spots for McCain are his ability to successfully handle the war in Iraq and protect the country from terrorism. The Arizona senator leads Obama in those categories in both states, the poll shows.
“He does have a whole lot more experience than Obama does,” said Republican poll respondent Maria Lyle, 25, a stay- at-home mother from Jackson Center, Ohio. “His ideas line up more with how I feel. With the terrorism issue, I feel we do need to have our troops over there.”
Palin Pick
McCain’s choice of Alaska Governor Sarah Palin to be his running mate appears to be a drag on the ticket in both states. Less than half of voters in Florida and Ohio view her as qualified to be president. By comparison, more than seven in 10 voters in both states say Democratic vice presidential nominee Joe Biden, a Delaware senator, is qualified to be president.
The survey of 809 registered voters in Florida — including 639 likely voters — and of 816 registered voters in Ohio — including 644 likely voters — was conducted Oct. 25-27. The margin of sampling error in both states is plus or minus 3 percentage points among registered voters, and of plus or minus 4 points among likely voters.
2. allyn aldrich | October 29th, 2008 at 10:16 am
The social security sistem is not stand alone since for many years the income has gone into the same pot as income taxes. Actually this plan onlymakes the present system honest by lumping the ss income tax in with the other income tax. I do not support Obama, but I do support this treatment of the ss income tax which at the present time is not progressive.
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