In his bid for the Democratic presidential nomination, Sen. Barack Obama appeals strongly to young people. His message to college students and graduates has been one of “hope” and “change,” but in the long run, he offers them remarkably little of either.
The prospects for the young have not changed. The coming entitlement crisis that looms when the Baby Boom generation retires has not gone away, and as the Financial Times reported recently, the lead U.S. analyst for the credit-rating agency Moody’s says that unless action is taken to bring spending under control in the next decade, the U.S. government may even lose its triple-A credit rating. Social Security and Medicare still face massive financial shortfalls that suggest reduced benefits or painfully sharp tax increases.
Throughout their primary campaign, Democratic candidates generally ignored the coming senior-entitlements train wreck — save for Barack Obama. He advocates the traditional liberal policy of resolving shortfalls by increasing taxes — in this case, by eliminating Social Security’s payroll-tax cap.
Tax increases to fix entitlement shortfalls hurt younger workers more than older ones. Yes, those close to Social Security’s retirement age will also pay higher payroll taxes — for a time. Younger voters will pay more for a lot longer. Not only is the Baby-Boom cohort of retirees larger than the current generation, medical progress ensures that they will live to riper and riper old ages. And yet the Boomers want the same benefits offered to seniors when they were footing the bill — despite the fact that they were paying for far fewer retirees.
That’s the 800-pound gorilla in the Social Security debate. The Boomer generation doesn’t have a lockbox full of cash to pay for their more numerous and longer retirements: their children must pay for it — which is precisely why economist Thomas Sowell, in his book, Applied Economics, calls Social Security a Ponzi scheme.
Barack Obama’s policy would impose a 60 percent increase in lifetime Social Security payroll taxes for some young voters. College-educated workers would lose the most under his plan, since their future earnings are likely to remain above Social Security’s maximum taxable limit for most of their careers.
A study by the National Bureau of Economic Research shows that under Social Security’s current rules, young college graduates will contribute about 5 percent of their lifetime earnings. Under Obama’s proposal, that number would rise to almost 9 percent, taking these individuals’ overall lifetime tax rate from 45 percent to 49 percent. By voting for Obama, a 22-year-old young college graduate earning $30,000 per year today would be opting to surrender an additional 4 percent of his lifetime earnings to the Social Security administration — and may get no benefits in return.
Put another way, Obama is proposing to significantly reduce the economic value of the college degrees his young supporters are struggling to attain and pay for. He is also reducing the incentives of his young supporters to stay in school even after graduating from college. By proposing higher payroll taxes, Obama proposes reducing or eliminating the value of those additional years of education.
There’s still time to hope that a presidential candidate with sound ideas on Social Security might yet win. Although no candidate is yet proposing it, restructuring Social Security by introducing properly designed personal accounts would better safeguard the economic prospects of younger and future taxpayers.
Contrary to campaign slogans and conventional wisdom, Obama is hardly a profile in courage in these matters. He proposes higher costs in exchange for the same or fewer benefits, while asking nothing from the older voters who’ve created the coming budget crunches. And he offers young people more of the same on the very issue that should concern them most — the coming crisis of the entitlement state.
– Jagadeesh Gokhale is a senior fellow at the Cato Institute and a former senior economic adviser to the Federal Reserve Bank of Cleveland. John Samples is director of the Center for Representative Government at the Cato Institute.