NCPA - National Center for Policy Analysis


June 26, 2008

Last week, Barack Obama revealed his plan to shore up Social Security's shaky finances by raising the income level on which the payroll tax is applied, says Donald L. Luskin, chief investment officer of Trend Macrolytics LLC.

Currently, incomes above $102,000 are exempt from paying the payroll tax, with that threshold rising every year indexed to wage inflation.  Obama would keep that limit in place, but then assess payroll taxes on incomes above $250,000.

  • Combined with Obama's other tax-hike initiatives, the total tax on labor would be close to 60 percent; in high-tax states like California and New York, the top rate would be even higher.
  • This would take us back to top tax rates not seen since the 1970s.
  • Obama's new tax would siphon off 0.4 percent of gross domestic product annually, says the nonpartisan Tax Policy Center.

For all those tax increases, Obama's proposal won't help Social Security's long-run solvency problems, says Luskin:

  • According to the Social Security Administration actuaries, uncapping all wages subject to the payroll tax (not just those above $250,000) doesn't make much difference to the system's long-run solvency.
  • If the increased payroll tax payments earn increased benefits, then only about one third of the system's 75-year shortfall is addressed.
  • Even if there is no corresponding benefit increase, only about half the shortfall is addressed.

The more taxes Obama's plan collects, the worse Social Security's long-term situation gets, says Luskin.  That's because all plans based on collecting taxes and saving them in the Social Security Trust Fund for future benefit payments rely on the U.S. government being able to redeem the Treasury bonds that trust fund holds; the money to redeem those bonds can only come from taxes.  So ironically, any tax dollars collected today will have to be collected all over again -- plus interest, says Luskin.

Source: Donald L. Luskin, "Obama's Social Security Fine Print," Wall Street Journal, June 25, 2008.

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