The voices of Tax Policy Center's researchers and staff
Barack Obama has a plan to fix Social Security. Or does he?
Obama does have a vague proposal to raise payroll taxes for workers making more than $250,000. But there is a lot less to it than meets the eye, and Obama has left some hugely important questions unanswered.
We know that Obama wants to create a donut hole in the system. In his scheme, if you make less than about $100,000 (actually $102,000 this year) you would pay Social Security tax as usual. You’d pay no payroll tax on wages from $102,000 to $250,000, but if you make more than $250,000 you would again be hit by the Social Security levy. But that’s all we know. When TPC pressed the Obama staff for details, we were told that none were available. Interestingly, they warned us against assuming that those in this newly taxable group would pay the same 6.2% rate as lower-wage workers, or that the employer share would be what it is today (also 6.2%). They also said they had not decided what compensation would be taxed.
Whoa. If Obama is hinting that those making more than $250,000 would pay a higher payroll tax rate, or that non-cash income, such as options or deferred comp, might be taxed, that is very big news. It would fundamentally change the way Social Security operates and run the risk of making the program look less like social insurance and more like welfare.
Here’s why: Today, benefits are linked, more or less, to contributions. The more tax you pay while you are working, the larger your monthly check after you retire. This has always been critical to the image--some would say myth—of Social Security. But if Obama is going to raise the rate for high-income workers, they will either get bigger benefits, or they won’t. If their benefits grow with their contributions, it will be tougher for Obama to make the program solvent, as he has promised. If their monthly checks shrink relative to the size of their contributions, he will have taken a big step towards decoupling the Social Security tax and its benefits.
Some on the left like breaking this linkage, but others fear it would drain support for the program. After all, why would politically influential wealthy people continue to back Social Security once they realize they are getting a lot less than they are paying in? Might they embrace private accounts, where at least they’d get to keep what they contribute?
The whole idea of the donut hole troubles me, if only because people making $249,000 are hardly middle-class. But it is what Obama is not saying that is really interesting.
Diane Lim Rogers did some nice sleuthing on this for her economistmom.com blog. So has TPC’s Len Burman. But the bottom line is Obama needs to say exactly what he has in mind. Social Security is too important for us to be playing guessing games.
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