Today, Barack Obama proposed what he called the "doughnut hole" approach to "fixing" Social Security. Under his plan, wages up to $102K annually would pay the SS payroll tax. From $102K to $249K, no payroll tax. Above $250K, the payroll tax kicks in.
So, what is wrong with this plan? It seems reasonable, albeit in a populist way. The guy making more than $250K won't miss that income, right? And it helps keep Social Security solvent for the lower wage earners, right?
The problem is that Social Security is not supposed to be a welfare or a wealth transfer program. It is a pay-as-you-go program that is supported by the current workforce. It was meant to be a kind of synthetic savings program so that working Americans would not retire into poverty because they had been forced to relinqush a bit of their checks every month into a "savings" program. Everybody pays into the program and receives benefits based on a point system, so it's not quite like putting your money away, but there is an attempt to make contributions match with disbursements.
But here's the catch. There's a cap on benefits, which is why we have a cap on contributions. So this new tax liability does not come with the promised benefit, which makes it, essentially, a combination welfare program and wealth transfer mechanism, which is what it is not supposed to be.
If Obama's proposal were to lift the cap, the new tax would not contribute any excess capital to the Social Security trust fund. It would be an incredibly inefficient savings plan for me, but at least I would have the possibility of getting a government IOU in 30 years. Unfortunately, it also would have little, if any, effect on the solvency of the Social Security program as you'd simply have massive disbursements in the out years.
But if his proposal doesn't lift the cap, it is essentially a brand new tax on my earnings for which I receive nothing. Zip. Nada. That's a pure wealth transfer program and that is not what Social Security is supposed to be. Given the taxes I am already paying for inept government services, I am not inclined pay more.
There are other problems. Employers foot a portion of the payroll taxes, so there would be a new burden on them. I can tell you from experience that if companies are paying a new payroll tax on their high earners, they are going to find that extra money by letting a lower earner go or not hiring for an open position. If this new tax funds an increase in benefits for lower wage earners, you can bet that management will reduce retirement programs to balance out the new benefit.
This kind of proposal is what I find objectionable about the whole Obama campaign. It is a populist, soak-the-rich policy program hidden behind a lot of posing about hope and change and this aura of faux "reasonableness."
But we've seen what happens to economies when soak-the-rich programs are put in place. Look at the UK in the 1970s, where the top marginal income tax rate was, effectively, 100% at one point. The country was nearly killed. Look at the 1970s in this country, when high marginal rates were the order of the day along with stagnant growth and high unemployment. Look at the cities, with their high tax burdens, where people fled in droves to avoid paying. Look at New York State, which was nearly destroyed by its insanely high corporate taxes in the 1980s.
It's unclear if Obama is also proposing to include Medicare taxes as well in this proposal. If he is, we are talking about a scenario where I would be paying a top marginal federal rate, inclusive of payroll taxes, over 50%. That's before New York State and, in my case, New York City taxes, which would drive it over 60%. These are the kinds of tax burdens where people begin to go out of their way to avoid paying taxes by any means possible. In the case of one of my investors, he is literally renouncing his U.S. citizenship because the tax burdens are so high (he also holds a passport from an EU country).
This is why I feel a dizzy flashback to 1976 when I hear Obama talk.
2 comments:
Dave--
Thanks for an honest reply. You poke holes in Obama's promise for a revised SS overhaul. Did you do the same for Bush's failed plan? Kindly link to your post if you did.
I'm not totally sure you shuddered as a 7 year-old in 1976 as you do now as a member of the $250,000-and-up income bracket that Obama promises to tax heavily.
I'm not suggesting that Obama's campaign promises are feasible. I'm saying that in our current political situation that there is a great divide between campaign strategies and Presidential policy decisions.
In all of your political analysis, I see you ignoring two factors completely: (1) campaign strategies. Why would Obama make promises he couldn't keep? Because that's precisely what Clinton and Dubya did to win elections and hold down the White House for the last 16 years.
(2) In our adult lives, there is no indication that the President can affect the distribution of wealth without kowtowing to special interest groups. Both Democrats and Republicans are hog-tied by corporate special interests. Your income bracket is safe.
Btw, your suggestion that an Obama presidency alone would negatively impact the 401k plans of the middle class is laughable. Under the ongoing relaxed corporate restrictions of a McCain presidency, you believe that the priority of multi-millionaire executives would be to refill the retirement coffers of their middle-class employees? I can tell you from experience that that scenario won't be happening. Incentive compensation will be eliminated for all but upper management.
Also, as a neophyte of economics, I'm curious how/when/why the dollar will revalue. That's an honest question, not a challenge.
I respectfully agree to disagree on social and foreign policy issues between the two candidates. And I personally don't care if the voting population in the $250k-and-up economic bracket feel disenfranchised by an Obama government, or feel that the government isn't providing ample returns for their 'investment', especially when there's no indication that the status quo for that income class won't continue.
Finally, I apologize if some of my recent comments came off as ad hominem attacks.
See you at Polvo.
Mike -
It's a bit of a cheap tactic (ironically, a favorite pundit tactic) to say that you didn't see my post on Bush's failed SS plan. I don't post on every single political issue under the sun. It seems to be an unreasonable standard to hold everybody to. It also sets up a false dichotomy. Just because I oppose what Obama is suggesting doesn't mean that I am for or against what Bush proposed. There aren't only two answers to the question.
I've noticed that you keep referring to campaign strategies in your comments on my posts about Obama. What am I supposed to do other than listen to Obama's campaign pronouncements in evaluating him? Look at his non-existent record? How am I supposed to divine his positions on the issues from his "present" votes in the Illinois legislature?
I don't see this as a BS promise that Obama won't keep. With a Democratic majority in both the House and Senate, he could do a lot of damage very fast. And, usually, the BS promises are attempts to pivot to the center. This is Obama still pitching from the left.
I have to call into question your second point. That's a pretty sweeping generalization and you provide no facts to support your case. And what is the relevance of "in our adult lives"? Who cares if I was only 7 in 1976. Carter was only 30 years ago, but the lessons are still relevant.
Also, I am having trouble seeing where I stated that an Obama presidency alone would negatively impact 401 k plans of the middle class?? Where did I state that? What I stated is that if management perceives that there is a new, larger benefit provided by the government, but funded out of taxes on management salaries, they would look at reducing benefits. I think that is pretty basic economics.
Mike, you said it all when you said that you didn't care if the $250K and up bracket is heavily taxed and doesn't feel that there is an ample benefit from that extra tax. If that's the way you view the world, you and I are not going to agree. I see this as a creeping move to transition Social Security into a wealth transfer and welfare program and I don't like it. And I have a strong suspicion that the "doughnut hole" is not going to last very long, meaning a complete removal of the cap.
Nobody is getting shafted by Social Security at the moment, Mike. The issues is not that nobody is getting benefits and we need to get them up again. The issue is that we keep raiding the SS trust fund, which is supposed to be a buffer, for current expenses. Seems to me that a more efficient solution to that problem is to start cutting current government spending drastically and make the practice of borrowing against the trust illegal. And given McCain's actual record of fighting against earmarks and other pork barrel, I will take him over Obama, who has absolutely no record.
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