Obama’s Non-Plan for Social Security

In the closing days of the presidential campaign, Barack Obama has had relatively little to say about Social Security — other than attacking John McCain for his (tepid) support for personal accounts. There may be a good reason for his reticence. 

Senator Obama has explicitly rejected any proposal to allow younger workers to privately invest part of their payroll taxes through personal accounts. He has also ruled out any reduction in Social Security benefits. Instead, he has proposed a 4 percentage point payroll tax hike, beginning in 2019, for individuals earning more than $250,000 per year in wages. While this fits in well with Sen. Obama’s “tax the rich” philosophy, it does very little for Social Security. 

As we know, Social Security will begin running a deficit — paying out more in benefits than it takes in through taxes — in just nine years, by 2017. Of course, in theory, Social Security is supposed to continue paying benefits after 2017 by drawing on the Social Security Trust Fund until 2040, after which the Trust Fund will be exhausted. In reality, the Social Security Trust Fund is not an asset that can be used to pay benefits. Any Social Security surpluses accumulated to date have been spent, leaving a Trust Fund that consists only of government bonds (IOUs) that will eventually have to be repaid by taxpayers. Therefore, in looking at Social Security’s looming crisis, what really counts is the program’s cash-flow solvency, which turns negative in 2017.

Senator Obama’s proposal would do very little to change this. Most people earning more than $250,000 per year receive the vast majority of their income in forms other than wages or salary. In fact, according to the IRS, only a little more than $1 billion in wages were earned by people with more than $250,000 in wage income. Assuming standard wage growth in the future, Senator Obama’s tax would generate barely $50 million per year. That would not even push back Social Security’s cash-flow insolvency by an additional year.

On one hand, compared to Senator Obama’s other proposed tax hikes, this one offers relatively little pain. On the other hand, it offers even less gain.

If you want to see a Social Security plan that actually works, check out Cato’s 6.2% solution.