Obama on Social Security

Obama promises (around minute 5) to protect Social Security, “today, tomorrow and forever.”  Perhaps he was thinking of the Elvis Presley song.  Obama’s love for Social Security aside, what does he plan to do to keep his loved one from a retirement of penury and destitution?  His stance is similar to McCain’s,

We… have an obligation to protect Social Security and ensure that it’s a safety net the American people can count on today, tomorrow and forever. Social Security is the cornerstone of the social compact in this country… Coming together to meet this challenge won’t be easy… It will take restoring a sense of shared purpose in Washington and across this country. But if you put your trust in me — if you give me ‘your hand and your heart’ — then that’s exactly what I intend to do as your next President.

Quite similar to McCain’s quote in my post on his Social Security position with a little lofty rhetoric added for good measure.  Obama’s position on Social Security is simple and straightforward: fill the revenue shortfall with more payroll taxes.  Social Security is funded with a payroll tax of 12.4% (you pay 6.2%, your employer pays 6.2%) on the first $102,000 that you earn.  Income above this level is not subject to the Social Security payroll tax.  The maximum amount that anyone can pay into Social Security in 2008 is $12,468 (counting your employer’s share).  The taxable base, called the contribution and benefit base by the Social Security Administration, is adjusted every year using an average wage index.  The taxable base is about 2.45 times the average annual wages in the United States.  There are two levers here to increase tax revenues.  One could raise the payroll tax rate, or one could raise the taxable base.

If you increase the payroll tax rate, then you change the amount of income you make at the margin for everyone who makes less than $102,000.  About 95% of individuals make less than this according to the 2006 Current Population Survey.  Thus changing the payroll tax rate would change the behavior of 95% of the individuals with an income.  Without appealing to a particular model or evidence, I would think a reasonable response to a payroll tax increase would be to work slightly less.

The alternative, increasing the taxable base, affects less than 5% of incoming earning individuals.  Increasing the taxable base would raise the proportion of income subject to the Social Security tax rate.  This would only affect people’s behavior up to the new base.  For example, suppose the base is raised to $150,000.  This would affect only those people who earn between $102,000 and $150,000.  If you earn above $150,000, then your behavior will not change, because the amount of payroll taxes incurred would not change.  You would simply pay the maximum and move on.  If you make between $102,000 and $150,000, then changing the amount you work does change the tax you pay.  Hence, we would see people in this income bracket, again with no model or evidence, work slightly less, since the additional benefit they see from working more would decrease.

Obama’s plan to make Social Security solvent is to raise the taxable base.  He does not make this proposal more specific by specifying the level to which he would raise the base, but this is much more specific than McCain’s plan.  Raising the taxable base would have the advantage of only affecting the marginal behavior of a small subset of income earners.  Here we have an example of Obama offering detail, while McCain offers rhetoric.  If one believes that Social Security is part of a social compact and should be maintained, then Obama offers a simple fix for the looming crises that imposes little change in people’s behavior.