[StBernard] Obama Wants Social Security to Be a Welfare Plan

[Westley Annis]

Obama Wants Social Security to Be a Welfare Plan 

His tax credit amounts to a radical change in the system.

By ANDREW G. BIGGS 

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.

 

APThis 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.