Thursday, November 6, 2008

Fixing Social Security—An Obama Priority

President-elect Obama has proposed to fix Social Security by transforming it from a partial contribution-linked, old-age benefit program into a more explicit tax-and-transfer regime. The transformation will further shatter the myth that payroll taxes represent an individual’s contribution to his old-age government pension by further breaking the link between contributions (payroll taxes) and benefits. The transformation will be done in a few short steps.

First, Obama has proposed to create a “Making Work Pay” tax credit, the principle source of giving middle-class Americans a tax cut. Workers will be provided with a refundable tax credit equal to their share of the Social Security payroll tax (6.2 percent of payroll) on the first $8,100 of earnings. Those earning up to $8,100 would receive $500 each or $1,000 per family. The credit would be completely refundable against personal income tax, offsetting that amount in income tax liabilities, but would likely be phased out for high income earners. Refundable also means that individuals or families would receive a government check for $500 or $1,000 even if they have do not owe any income tax. The refunds would ostensibly come from general revenue, but that is a mere accounting notion, as the money has to be borrowed in any case.

Second, currently projected to start in 2018 or later, Obama would impose additional Social Security tax on persons earning more than $250,000 a year, at an initial rate between 2 and 4 percent, split between employer and employee. He has yet to specify if the tax would apply to capital income (dividends, interest, capital gains) or whether those paying the tax would receive larger benefits (unlikely).

Once in place, the size of the refundable tax credit could be increased, the rate of additional tax on those making over $250,000 could be increased, and the $250,000 threshold could be lowered.

With these changes, the Social Security payroll tax would morph into a much more explicit income redistribution scheme. Nor would it take much effort to extend Obama’s transformation of Social Security to Medicare, and then combine the two.

1 comment :

Anonymous said...

A lifetime of participating in the workforce, workers should be able to count on a secure retirement. Social Security is the most effective way working people have of guaranteeing themselves a reliable income in their old age.

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