June 23, 2008

Barack’s Social Security A-bama-nation

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 9:34 am

Note: This column was first posted at Pajamas Media on Saturday morning.

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In a speech in Columbus, Ohio on June 13, Barack Obama proposed a massive tax increase to fund the Social Security program.

A Democratic presidential candidate proposing a tax increase is not exactly news. But this is no ordinary tax increase.

For the first time in the history of Social Security, Obama would impose the payroll tax on a group of people — anyone earning over $250,000 from work or self-employment — who would receive no additional benefit in return. The Illinois senator would carve out a “doughnut hole,” sparing those who earn between the current maximum taxable earnings of $102,000 and $250,000 from having to pay any additional tax.

This is a tax increase that is stunning in both size and scope, as this chart shows:

SocSecObamaProp0608

Obama’s justification is particularly odious (statement comes at about 7:00 into the linked video):

Right now the Social Security payroll tax is capped. That means that most middle-class families pay the payroll tax on every dime that they earn. But once you get to $102,000 per individual, then you’re no longer paying the payroll tax. And what that means is that ….. you’ve got billionaires and miliionaires who are paying ….. payroll tax on only a tiny fraction of their income.

Obama’s class-envy rhetoric obscures his proposal’s abandonment of what has been, until now, an immutable principle of Social Security: Every dollar a person pays into the system affects the amount of his or her Social Security retirement benefits, should he or she live to see that day — not by much, in the case of those whose earnings are in the top half of the taxable earnings range, but at least by a bit. Those who earn more than the taxable threshold aren’t taxed; but, in exchange, they don’t receive any additional benefits.

If Obama’s proposal were ever to become law, those days would be over.

There’s a supposedly open item in all of this that I believe has a pretty obvious answer. On June 4, as the outline of what Obama intended to propose began to become clear, the Wall Street Journal speculated on it:

A key question that the Obama campaign hasn’t yet answered is whether higher earners under his plan would collect more in Social Security benefits than under current law, to reflect the additional payroll taxes paid.

Many economists argue that if the earnings cap is lifted, it would be unseemly to pay benefits according to the current formula to wealthy CEOs who don’t need to rely on Social Security for financial support in retirement.

That’s exactly right. Although it might arguably be “fair” to extend benefits to high-income earners proportionate to the taxes they have paid in, it’s clear to me that any legislator or president attempting to defend doing this would be committing political suicide.

Thus, I believe that Barack Obama has no intention of increasing Social Security benefits paid to anyone he is targeting for the new tax beyond what the system currently provides — or if he claims he will, it will never happen. Instead, the Illinois senator simply wants to force the person earning $1 million, or $10,000,000, along with his or her employer (very often the same person), to kick in a combined additional $93,000 or $1.2 million, respectively, because …. well, because he can.

Obama’s proposal thus officially severs the earnings/benefit linkage for the first time in the 70-year history of Social Security. As Jim Taranto wrote in the Wall Street Journal on Monday:

Obama’s proposal to use Social Security as a means for taxing “the rich” amounts to a repudiation of the program’s original New Deal conception. Social Security is supposed to be a pension for workers, not a redistribution scheme. That is why Democrats have, over the years, resisted efforts at means testing–i.e., preventing the wealthy from collecting benefits. Obama’s proposal would convert Social Security into nothing more than another welfare program.

Many don’t realize that Social Security is already means-tested in at least two ways:

  1. The more you make, the less you get, as a percentage of what you earned while you were working. You’ll see that this is the case if you work through and understand the larger implications of the examples that begin on this page at Social Security’s web site.
  2. If you make “too much” while you’re retired, you have to pay federal income tax on either 50% or 85% of your Social Security benefits.

Obama’s proposal effectively means-tests Social Security all the way up the income scale, piling additional insult on top of existing injury. Class warriors may take comfort in the money they will take from the rich, but I doubt that they have an answer to this question: How is the economy going to avoid a meltdown if its highest earners see their take-home pay and spending power cut by so much?

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2 Comments

  1. For anyone who changes employers mid-year, the “doughnut hole” would likely be ignored by the second employer. Therefore, you’d Employer #2 would withhold beyond the capped amount, in the supposed doughnut hole, throughout the current calendar year. Then, some time the following year, when you do your tax form, you’d get back the excess withholding in your rebate.

    In short, a doughnut hole would create a mess for employees who change jobs mid-year.

    Comment by Cornfed — June 23, 2008 @ 7:56 pm

  2. #1, actually I think it’s worse than that from the employer’s perspective:
    - Let’s say you earn 75K for 6 months at two different jobs, so $150K for the year.
    - You’ve been overwithheld (round numbers) by $3,100 (6.2% x 50K), and get it back in the process of filing your 1040.
    - One of those employers should be entitled to get their $3,100 back — or maybe the two employers are supposed to split it. But I don’t think anyone gets anything back.

    Now let’s look at the doughnut holes:
    - Take someone earning $125K for six months at two different jobs, so $250 K for the year.
    - Each employer withheld on the first $100K (round numbers again), and not $25K.
    - You would get 6.2% x $125K ($7750) back on your return. Employer A should get back 6.2% x $25K ($1550), and employer B should bet bacl $6,200 (6.2% x $100K).
    - I’ll betcha neither employer gets back anything.

    You are right that it’s a “mess” for employees because they don’t get to recognize an increase in take-home pay when they should be able to. Yeah, they get it back on the 1040, but they shouldn’t have to wait.

    But if I’m right, the employer pays in money that really shouldn’t have had to be paid in at all. In each case, if I am right, employer money just disappears into the black hole of SocSec.

    If I’m wrong, I hope someone reading this corrects me.

    Comment by TBlumer — June 24, 2008 @ 7:17 am

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