Politics & Government

Obama win likely to mean Social Security tax hike for wealthy

The Breakers, a hotel created originally for the wealthy
The Breakers, a hotel created originally for the wealthy Thomas Swick / Ft. Laurderdale Sun-Sentinel

WASHINGTON — Barack Obama wants wealthy wage earners to pay more Social Security taxes.

While his plan would pump badly needed billions of dollars into the system, it also would fundamentally change how the program is funded. Many economists think that the economy would hurt by sending the overall tax burden of some rich folks soaring past 60 percent, which one analyst thinks that Obama's proposal would do.

His plan would work like this: Those who now earn $102,000 annually or less, a figure that's adjusted each year for inflation, would continue to pay the 6.2 percent Social Security tax, while their employers also paid 6.2 percent.

People who earn $102,000 to $250,000 would continue to pay no Social Security tax on those additional earnings, but those who make more than $250,000 — roughly 1 to 2 percent of all workers — would resume paying the tax. Medicare payroll taxes, which have no income limit, wouldn't be affected.

Obama's campaign has offered few other specifics, such as effective dates or precise revenue estimates, saying "these are details he would want to work out with Congress in a bipartisan manner." The Illinois senator's position has changed somewhat from last fall, when he said that "lifting the cap" on all wage earners was "probably going to be the best option."

John McCain's economic adviser, Douglas Holtz-Eakin, has said that the Arizona senator wouldn't consider a tax increase. But McCain agrees with Obama that Social Security needs help.

The program's trustees reported earlier this year that costs would begin to exceed Social Security tax income in 2017. Interest from Treasury securities will keep Social Security solvent, but only until 2041.

The Obama plan is stoking concern on several fronts, however.

John Laitner, the director of the University of Michigan Retirement Research Center, noted that Social Security was designed as an insurance system, in which people paid premiums and later drew benefits.

However, Obama's plan moves Social Security "further in the direction of redistribution and away from mere insurance," he said.

Obama's plan would help cut the projected Social Security shortfall by about half, by raising an estimated $629 billion over the next 10 years, according to an analysis by the Urban Institute-Brookings Institution Tax Policy Center.

"Kudos to Senator Obama for kicking off the discussion," said Leonard Burman, the center's director and a former Clinton administration Treasury official, "but let's hope that policymakers soon move beyond the simplistic solutions."

He and other analysts are particularly worried about what's likely to be a much bigger tax burden for the wealthy.

Under Obama's proposal, Burman estimated, wealthy workers in some high-tax states would end up paying taxes on their wages of more than 60 percent.

In addition to the Social Security tax — 12.4 percent for the self-employed — they'd pay the Medicare tax of 2.9 percent; a top marginal income tax rate that Obama has suggested he may want to raise to 39.6 percent from the current 35 percent; an Obama-driven phase-out of itemized deductions, which effectively adds another 1.2 percent to the tax rate; and state and local taxes.

Whether that's good or bad policy has been the source of endless debate.

"Obama raises revenue from the rich in the worst way possible," said Gerald Prante, senior economist at Washington's Tax Foundation, a research group. Many economists think that taking bigger chunks of someone's income discourages him or her from spending and investing.

Obama loyalists contend that the plan would have the wealthy pay what the campaign calls their "fair share," and would save the system — unlike, they say, what McCain wants.

"What Senator Obama is proposing is something we have always thought should be on the table," said Jeremy Funk, a spokesman for Americans United for Change, an activist group.

"But our primary mission as an organization, unlike Bush and McCain, is keeping privatization off the table, which would dismantle Social Security as we know it."

McCain has said he likes the idea of allowing young people to invest some of their payroll tax money in private accounts.

Historically, 90 percent of total wages in this country were subject to the Social Security tax, and the income cap changed each year depending on wage growth. Because the earnings of higher-income employees have grown more quickly than the average wage, today about 83 percent of earnings are subject to the payroll tax.

Restoring the 90 percent standard would mean a cap of about $170,000, enough to close about one-third of the funding gap, according to an AARP analysis.

But doing so would sock the very voters Obama and McCain need the most. Prante notes that most six-figure wage-earners tend to live in urban and suburban areas, clustered in crucial states with big blocs of electoral votes.

Laitner suggested that Obama also could be creating new political problems for himself. "Taxing way above the current cap might risk jeopardizing some of the system's political support," he said.


The history of payroll taxes

The Tax Foundation's study on the impact of higher payroll taxes

The American Academy of Actuaries' study on Social Security options