NCPA - National Center for Policy Analysis


March 12, 2008

Until recently, Sen. Barack Obama took a responsible position on Social Security, noting the urgency of reform and saying all options should be on the table, says Andrew G. Biggs, a resident fellow at the American Enterprise Institute.  But having cornered himself among Democratic activists whose attitudes toward Social Security reform range from demagoguery to denial, Obama has recently veered sharply left.  He now proposes to solve the looming Social Security shortfall exclusively with higher taxes.

Obama's proposal is to make a significant change to the payroll tax system:

  • Currently, all wages below $102,000 are subject to a 12.4 percent Social Security payroll tax, but all wages above that amount are not subject to the tax.
  • Obama wants to eliminate the cap, but, in a concession to taxpayers, exempt wages between $100,000 and $200,000; he wants to create a "donut hole" in the taxing mechanism that pays for the nation's largest retirement program.

The Policy Simulation Group's Gemini model estimates that Obama's proposal, if phased as he suggests, would, for all of its expense, solve only part of the problem:

  • A 10 year phase-in, for example, would address only 43 percent of Social Security's 75-year shortfall.
  • This is assuming that Congress would save the surplus from the tax increases -- almost $600 billion over 10 years -- rather than spending it, as Congress does now.
  • Obama's plan would keep Social Security in the black for only three additional years; by the 2030s the system would still run an annual deficit exceeding $150 billion.
  • Obama's modest improvements to Social Security's financing come at a steep cost, effectively raising the top marginal federal tax rate to 50.3 percent from 37.9 percent, equivalent to repealing the Bush income tax cuts almost three times over.

Source: Andrew G. Biggs, "The Obama Tax Hike," Wall Street Journal, March 12, 2008.

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