Senator Obama has offered his ideas on how to deal with Social Security’s looming deficit and, more broadly, with worries about the state of American retirement savings. The best that can be said about his panaceas is that they lack imagination. Since the accompanying statements show that the Democratic anointee has no grasp of how Social Security works or of what the government currently does to encourage savings by low-income workers, lack of imagination is a virtue. If he let his fancy run free, he’d likely come up with a contrivance as Rube Goldbergish as the Democratic suite for “rescuing” Medicare.
The Obama retirement savings policy has two major elements:
An additional 12.4 percent payroll tax, half withheld from the employee, half paid by the employer, would be imposed on wages above $250,000 a year. (People making less than that are declared to be “middle class”, a reference point worth preserving for the future.) This levy would raise the highest marginal tax bracket for earned income from 35 percent to 47.4 percent (or 41.2 percent, if one pretends that nobody bears the burden of the employer’s share), producing cash for Slick Barry’s array of new domestic spending initiatives. It would have no impact whatsoever on the long-term funding of the Social Security System. The new revenue stream will be spent as it is collected, not invested to meet future benefit obligations (a bad idea in any case, as I’ve discussed elsewhere). The benefits paid 20 years from now will have to be paid from revenues raised then. Past payroll tax surpluses will be of no help.
All workers would be enrolled in 401(k) plans (or a similar arrangement under a different name). Unless they opted out, a “small percentage” of their pay would be contributed automatically to their accounts, and the government would match 50 percent of the first $1,000 contributed. This proposal is an extremely modest expansion of what the Bush Administration has put into effect through the savers’ tax credit and the optional deposit of income tax refunds in IRA’s. Automatic 401(k) contributions, with the ability to opt out, have been allowed for years and were formalized by the Pension Protection Act of 2006. It’s nice that Senator Obama recognizes the virtues of these Bush innovations and wants to enhance them in a small way. He seems, however, to be under the impression that he has put forward something new and dramatic. (Curiously, he also seems to think that investing in the stock market is a bad idea, so maybe this part of the proposal is put on the table without enthusiasm.)
In summary, Senator Obama believes that the nation faces a retirement income crisis and wants to do nothing in particular about it.
There is, in sober fact, an argument for viewing Social Security without alarm. Compared to European systems, ours is in pretty decent shape. If everything continues on its present trajectory, the excess of benefit payouts over payroll taxes will rise over the next 30 years to roughly one percent of the GDP. That will be a substantial burden on the next generation, but not a catastrophe.
The reasons for concern are, first, that there is a wide range of uncertainty in these projections (aggravated by increases in life expectancy and a weak birth rate) and, second, that it is foolish to make a major portion of each generation’s retirement income dependent on the good will of the next.
Despite the “communitarian” blather that sometime insinuates itself into these debates – how sweet it is for children to care for their aging parents – I’ve never met an old person (a category into which I’m making my own transition) who didn’t prefer independence and his own investment portfolio. Senator Obama is evidently aware of this preference, for it is the rationale for his retention of the Bush retirement savings incentives, but not aware enough to take it seriously, for he would keep them at approximately the same limited level. He has not, for instance, picked up the President’s own proposal for greatly increasing retirement savings opportunities through “lifetime savings accounts” [last item]. That never went anywhere, because the Left denounced it as benefiting “the rich”. I’d be more inclined to think that this year’s Democratic candidate was something other than a tired old leftist if he displayed a tenth of W’s creativity and boldness.
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