Media Misses Historic De-Linkage in Obama Social Security Proposal

Press coverage of Barack Obama's Social Security proposal in Columbus, Ohio last week made many of the usual mistakes any time there's a story about the government's "third rail" program. But in this case it missed what would be a historic de-linkage of payments made into the system from benefits paid out.

First, here are the key paragraphs from the Cincinnati Enquirer's coverage of Obama's speech (bolds are mine):

Sen. Barack Obama promised senior citizens Friday that as president, he would protect Social Security benefits and provide universal health care.

To extend the life of Social Security, Obama proposed applying a payroll tax to annual incomes above $250,000, affecting the wealthiest 3 percent of Americans. The Democrat also proposed eliminating income tax for any retiree making less than $50,000.

..... Obama said it is unfair for middle-class earners to pay the Social Security tax "on every dime they make," while millionaires and billionaires pay it on only "a very small percentage of their income."

..... The total Social Security tax rate of 12.4 percent is now evenly divided between workers and their employers. The workers' 6.2 percent payroll tax is applied to all wages up to $102,000 a year, which covers the entire incomes of most Americans.

Under Obama's plan, the tax would not apply to wages between that amount and $250,000.

But all salaries above the $250,000-a-year amount would be taxed under his plan, Obama said.

The "a payroll tax" reference in the first bolded item in the excerpt gives the impression that the rate of any payroll tax applied to annual incomes above $250,000 might be something other than the current 12.4% (6.2% paid by the employer, 6.2% withheld by the employee, or the entire 12.4% paid by anyone who is self-employed). But references to "the payroll tax" on the "Seniors & Social Security" page at Obama's campaign web site and in his "Seniors Fact Sheet" (a PDF available at the "Read the Plan" link at the bottom of the "Seniors & Social Security" page) make it clear that there has been no contemplation of changing the current rate:

While the first bolded item in the excerpt also claims that the tax would apply to the "wealthiest" 3% of Americans," the article's full context clearly indicates that the Obama proposal is actually targeting "the 3% of Americans with the highest annual earnings." That is not an unimportant distinction: A person who makes over $250,000 a year and spends it all is not "wealthy"; a person making less than that amount who consistently saves and is a reasonably successful investor could be very wealthy.

But the big omission in the coverage was the Obama proposal's abandonment of this following formerly immutable fact: As onerous as the Social Security tax has been in its relentless march up the salary hierarchy, those paying in could take minor consolation in the fact that their Social Security retirement benefits, should they live to see that day, would be slightly higher with each additional dollar of taxable earnings.

Social Security currently calculates old-age benefits by looking at all taxable wages earned during a person's working career. After adjusting each year's earnings for inflation that has occurred during the intervening period, it takes the highest 35 years of taxable earnings and calculates a person's "Average Indexed Monthly Earnings" (AIME). The higher the AIME, the higher the benefit.

"Millionaires and billionaires" (actually, as noted, "high earners") don't pay into the system once they hit the current maximum taxable earnings amount of $102,000, but they also receive no additional benefit. How that is "unfair" is a mystery.

Further, most of the rich, along with many seniors whose earnings and wealth barely make them middle-class, are penalized once they reach retirement. That's because of tax legislation first passed in 1986 and made worse 1993. If their income from other sources during retirement is "too high," they must pay federal income tax on either 50% or 85% of their Social Security benefits. If anything, the system taken in its entirety is already unfair to high earners, along with many other retirees.

But Obama's proposal would go much further, severing the earnings/benefit linkage for the first time in the 70-year history of Social Security. The payroll taxes collected from those whose earnings from work is greater than $250,000 would simply be a Robin Hood wealth transfer from the highest-earners to others. Team Obama surely does not plan to provide for additional benefits for the highest earners. Obama would, most likely irretrievably, turn Social Security into just another welfare program.

The Obama plan, with the exception of the "donut hole," is in fact a re-run of the unlimited Medicare tax passed in 1993 -- only much, much larger.

In 1993, the earnings ceiling for Medicare taxation was removed. In case it makes anyone feel good (why it would, I don't understand), someone with earnings from work of $1 million pays $29,000 a year into the Medicare system ($14,500, or 1.45% of earnings, paid by the employee, with the same amount paid by the employer; or the entire 2.9% paid by the self-employed). High earners are propping up the still-tottering Medicare system with no hope of ever receiving anything resembling proportional benefits.

The Obama plan would make the Medicare tax increase look like child's play. Instead of paying $12,648 per year into the system ($102,000 x 12.4%) and at least getting an incremental benefit increase, someone with earnings from work of $1,000,000 would now pay in a whopping $93,000 more ($750,000 in earnings above the "donut hole" times 12.4%) -- and would get nothing in return.

It would nice if the press would give concrete examples of the financial impact of what Barack Obama is proposing in this and other areas. It's not really that difficult. Better yet, perhaps the media could put a hold on its non-stop hero worship long enough to ask Obama how the economy will be able to grow if its highest earners see their take-home pay and spending power cut by 9%-12%.

Cross-posted at BizzyBlog.com.