Monday, February 18, 2008

Obama's Soc. Sec. "Coverage"

Hopped on Obama's issues website after hearing the rumor that he wants to eliminate the cap on Social Security wages. If you're not familiar, right now we all pay SS taxes on the first $97,500 we earn. That figure is matched by our employers so that we pay $6045 out of the first $97,500 and the employer pays $6045 more.

The theory behind the cap is that SS was originally intended to be a supplement to retirement. We would get back according to what we put in. It was not meant to be a welfare-type program where the folks who didn't pay much in (or any in) would get back as much as everyone else.

Senator O says this on his website:
"The first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century."

I love the use of the word "covered" here! That's not "covered", that's "taxed".

And then here in a op ed piece he wrote last fall:
"One possible option, for example, is to raise the cap on the amount of income subject to the Social Security tax. If we kept the payroll tax rate exactly the same but applied it to all earnings and not just the first $97,500, we could virtually eliminate the entire Social Security shortfall."

I take that to mean that all income would now be "covered"--the sky's the limit on this "coverage". I also take that to mean that this extra cash from the new "coverage" would be used to "virtually eliminate" the existing shortfall. I guess employers would have to match the "coverage" as well--call it double coverage, like in the NFL.

What might some unintended consequences be?

Let's take Dick and Jane. Dick teaches high school and coaches football in the 'burbs of New Jersey and makes $60,000 a year. Jane sells computer widgets, makes a base of $110,000, and had a great bonus/stock options reward last year of $40,000. I bet that's not uncommon for a good number of folks living in a metro area on either coast. What would Senator O's extra "coverage" mean to them?

An extra $6045 a year in taxes.

Now, how might that affect Dick and Jane's spending habits? Well, they're a little nervous these days bc. their house value is down over the last two years, their 404(k) is down over the last two months, and they're really worried about Jane's bonus this year bc. everyone's talking recession.

My guess is that they'll do two things. First, cut back on the doo-dads. They'll put off replacing the car, building a new deck, or buying that flat screen at Best Buy. They'll go to Six Flags instead of the Grand Canyon. This reduction in discretionary spending will only add to the "recessionary pressure", as it's called it on CNBC.

Second, they'll freeze or cut or, at the very least, give second thought to their charitable giving. They're already one of the decent givers at church with a $4,500 contribution to the annual fund. They were happy to do it. They're being asked to increase their pledge by ten percent. But with with an extra $500 a month going to SS, and house prices still falling, and the market in a tizzy. . . . .

And the YMCA that's doing a capital campaign for an addition? D & J will wait a year to commit just in case the the market hasn't found a bottom yet.

It's easy for Senator O to say he's just going to erase that cap. It might even be true that it's no big deal, Junior's SS in more important and D & J can "afford it".

It might not be so easy to deal with the opportunity costs and unintended consequences $6045 of extra "coverage" for Dick and Jane.

Just another way of looking at things. . . .


  1. Will,

    Good to see your fall didn't impair your economic reasoning capabilities.

    Keep up the posting for all of us capitalists surrounded by progresso-socialists.


  2. Am I Polly Anna? In regard to SS, I hope that Obama, when he takes office, will have someone who sees (and understands) the trees if the forest is all he can see. You know, you can argue upteen issues with solid logic, where this election will end is Obama vs McCain and McCain won't have a chance to beat Obama. Most of it will be based on elements that have nothing to do with much of anything of substance.

  3. I believe you're right, Polly. Obie seems a shoo-in. It'll be the Jimmy Carter years all over again.

    There certainly are more voters who pay no income tax at all and who would love to get rebates NOW on their FICA taxes coupled with a PROMISE that their retirement benefit will remain the same than there are voters like Dick & Jane.

    Doesn't mean I can't make the gloomy prediction of the return to Jimmy Carter era stagflation, gas prices, interest rates, and tax rates. Ahhhhh, the malaise. . .


    p.s. Don't forget the emboldened Ayatollahs of that era, either.