Obama's Empty Social Security Fix

By :: August 14th, 2008

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.

In truth, his original plan was never much to write home about. He wanted to raise taxes for those making more than $250,000 but, oddly, not for those making between about $100,000 (the current Social Security payroll tax cap) and $250,000. So, someone making $60,000 would still be paying a larger chunk of their income in payroll taxes than someone making four times as much. This was the design that wags dubbed the donut hole.

To add to the muddle, Obama has never said much about what that extra tax would look like. In a Wall Street Journal article today, economic advisers Jason Furman and Austan Goolsbee now say the rate would be between 2 percent and 4 percent. But would only wages be taxed, or would other income be subject to the levy as well? Would benefits rise with contributions? Would this really turn out to be nothing more than a 2 percent income tax surcharge on the rich, as some inside the campaign have hinted? It was all a state secret.

Obama took plenty of heat from the Democratic base for suggesting that anything needed to be done to fix Social Security. At the same time, moderates and conservatives objected to solving the problem only with tax increases while ignoring the benefit side. Quietly, Obama aides say he might accept some benefit reductions as part of a deal with Congress, but he would never propose such heresy.

So, with no real plan, and no one stepping up to pin a medal on him for bravery in the face of entitlements, Obama has abandoned the field. Unlike a phased-in reduction in future benefits, in today's political environment a tax fix with a 10-year fuse is no fix at all. With John McCain saying little more than how he supports yet another bipartisan commission to repair all entitlements, it seems we have heard the last of Social Security until after next November.

9Comments

  1. Anonymous  ::  6:14 pm on August 14th, 2008:

    I mostly agree with this, but Obama's proposal might actually make some policy sense: if the trust fund isn't 'real' saving but essentially a subsidy to the rest of the budget, then it doesn't make much sense to raise Social Security taxes before the system starts running deficits (2017). Admitting the trust fund isn't real saving would probably cause Obama more problems on the left than it's worth, though, so I don't expect to hear this explanation.

  2. Anonymous  ::  8:26 am on August 15th, 2008:

    The WSJ piece also was emphatic about Obama delivering a net tax cut — but mute about how this was going to finance his universal health care plan.
    Krugman has voiced displeasure about this in his column once already: “…to pay for universal health care, which was supposed to be the overriding progressive priority in this election … Why doesn’t Mr. Obama propose raising more money?”
    And that was when he thought Obama was raising revenue — not promising to cut it.
    As an ironic touch, the piece solemly states:
    “Sen. Obama believes that responsible candidates must put forward specific ideas of how they would pay for their proposals.”
    Then goes on to attack McCain for doing just that — telling how he would pay for his health care plan.
    “Sen. McCain's plan does include one new proposal that would result in higher taxes on the middle class. As even Sen. McCain's advisers have acknowledged, his health-care plan would impose a $3.6 trillion tax increase over 10 years on workers … Even after accounting for Sen. McCain's proposed health-care tax credits, this plan would eventually leave tens of millions of middle-class families paying higher taxes.”
    The argument seems to be, pretty much literally, that paying for McCain's modest health insurance proposal is too expensive tax-wise for people to accept, but Obama's universal health care proposal is free and comes with a tax-cut bonus.
    Either that or the people who really believed “universal health care … was supposed to be the overriding progressive priority in this election” are in for a bigger letdown than the Social Security reformers.
    Or, maybe, this is all merely just more old, old style politics.
    “Promise 'em all what they want to get, never mention the cost.”

  3. Anonymous  ::  4:37 am on October 11th, 2008:

    You are right about the hole. Of course, it may be that Obama was not familiar with it. I am not sure Social Security is his policy area.
    Raising the cap a little bit will keep the system solvent. Blowing the cap away only makes sense if you introduce some type of personal retirement account.
    Of course, not all such accounts look the same. George Bush is probably thanking his lucky stars that his plan died, as the index funds he would have put everyone's money into tanked. Such funds would have included toxic paper, so they would have tanked big.
    There is another type of personal account, one I suggested in Labor and Corporate Governance, January 2003 that would not have tanked. In fact, if combined with the piece that the AFL-CIO Investment Office had pulled the following month, there would have been no subprime crisis and no bubble. I proposed channeling money into employee ownership, some into direct ownership and some into a diversified fund – which I later modified to be a mutual insurance fund of employee-owned firms. Such firms would also provide mortgages to their employees rather than having them go to banks with no interest and a shorter payback – maturing when the retirement portfolio matures. In time, this would have taken most major firms private and taken most mortgage paper out of the banks. The Dow would still be down, but tht would be because volume would be down – if there even would be a Dow. I would have raised the cap, or even blown it away, and ended bend points – instead diverting the entire employer contribution to be privatized (which would be higher with higher caps) toward employee-owned shares distributed EQUALLY so that the savings scheme replicates the payout scheme of the current program. The portion diverted from the Employee Contribution would go toward the mutual insurance fund – provided an employee contribution was required at all. A viable alternative would be to lower gross incomes by the amount of the tax and have only a 10% of average full-time income employer contribution (with some fraction for part-timers) and the remaining taxes diverted to a business income tax.
    Too bad labor didn't go for it, since the ownership scheme could include using the unions to vote the proxies of their members in a non-unitary board.
    This scheme could start right away, and would be helped along by increased income taxes to more quickly convert the Social Security Trust fund to private accounts.
    This is the right answer, because it gives both sides something to hate. The right despises socialization of benefits while the left despises privatization. In the end, however, it would work if tried.

  4. Anonymous  ::  4:47 pm on March 26th, 2010:

    You wrote an excellent article, I'm gonna tweet it right now.

  5. Anonymous  ::  4:32 pm on April 6th, 2010:

    A comment was posted here that was deleted that I would like to answer. Social Security will be here unless private accounts are enacted, because the social security trust fund has a valid and legal claim against the full faith and credit of the United States and the taxpayers thereof. Any long term problems it has have more to do with demography than the way the program is set up – so the way to assure its survival is ultimately to have more kids, which is more doable if subsidies for additional kids are funded from a VAT (which taxes all revenue earned in the nation) rather than income and payroll taxes, which only tax wages and not profits.

  6. Anonymous  ::  6:00 pm on April 13th, 2010:

    The credibility factor is infinitesimally low. It is as if George Bush had promised in 2003 that he'd withdraw from Iraq in 2013.Michel Trianz.

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