SOCIAL SECURITY PAYROLL TAX CUTS (AND TAX INCREASES)
October 29, 2008
Barack Obama is proposing a Social Security payroll tax cut for low earners, with workers earning up to $8,000 per year receiving the full 6.2 percent employee share of the 12.4 percent 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.
Low earners receive more in benefits than they pay in taxes -- meaning their "net tax" is already negative -- and Obama's plan would increase net subsidies from the program. This tax cut would make an already progressive Social Security program even more redistributive, says Andrew Biggs, resident scholar at the American Enterprise Institute.
- Under current law, a very low earner receives an inflation-adjusted return on his Social Security taxes of around 4 percent.
- A high-earning worker, on the other hand, receives only around a 1.5 percent rate of return.
- Under Sen. Obama's proposal, returns for very low earners would rise to around 6 percent 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. 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 percent and push the program into insolvency in 2034, versus 2041 under current projections.
- To fill the hole in Social Security's finances, Obama would increase income taxes on high earners and, for the first time, pour that income tax money into Social Security.
While Social Security has always been progressive, many would say this plan goes too far and risks turning Social Security into a "welfare program," says Biggs.
Source: Andrew G. Biggs, "Obama Wants Social Security to Be a Welfare Plan," Wall Street Journal, October 24, 2008.
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