The Corner

Obama’s Social Security Plan

Obama wants to apply payroll taxes on wages above $250,000, not just wages under $102,000.

Glenn Kessler writes in the Washington Post: “Fully eliminating the payroll tax cap would provide more than enough income to keep Social Security solvent for more than 75 years; Obama’s current proposal would fall short of that goal, the adviser acknowledged.” That’s technically true, but misleading. Let’s say you got rid of the payroll tax cap entirely–applied it to all wages–and didn’t pay retirees anything more for their extra contributions. The Social Security Administration’s actuaries say that this change would reduce the long-term annual deficits of the program by only about one quarter. (You can follow the links here and do the math yourself. The present-law deficit is 5.7 percent of taxable payroll; after the cap is eliminated, it’s 3.64 percent of taxable payroll; but eliminating the cap increases taxable payroll by 19 percent. 3.64 x 1.19 / 5.7 = 0.76–which means that 76 percent of the cash deficit is still there.)

Kessler isn’t lying. He’s just using a common but unhelpful definition of “solvency.” Eliminating the payroll-tax cap puts enough IOUs into Social Security’s “trust fund” to make it solvent for more than 75 years. But the federal government needs to have enough cash to make good on those IOUs, and eliminating the cap gets you, as I said, only about one quarter of the way there. And Obama’s plan falls short even of this goal.

Social Security is structured so that the more you pay in, the more you get back. That’s what supposedly makes it a compact among the generations and not a welfare program. Actually, what it does is make it an inefficient, disguised welfare program. If Obama would give high-earners more Social Security benefits in return for making them pay more, then of course his plan would fall even shorter. It would also be a little strange: Why take money away from these folks to give some of it back to them? If he does not give them more benefits, he will be changing the Social Security program in a fairly big way.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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