Sunday, October 28, 2007

Obama on Social Security: What The?

Senator Barak Obama (D-IL) was apparently feeling his oats in Iowa yesterday while accusing his Presidential Primary opponent Senator Hilary Clinton (D-NY) of not being honest with the public concerning her ideas about Social Security. This is not playing into a strong hand for Senator Obama as he appears to not have a clue concerning that governmental program. Sen. Obama has been stating that we should take the "cap" off of Social Security payments, Social Security taxes 15 1/2% (half paid by the employer, if applicable) of the first $98,000 of taxable income (a level that increases yearly) and nothing above that level, thus the "cap". Income above that level is not taxed for the sensible reason that the system does not pay benefits based on income above that level.

In addition to some fundamental fairness questions there are also the questions concerning the advisability of implementing the Obama plan that in addition to the current top federal tax rate of 35% would result in a top tax rate over 50%; and that is before the Democratic promise to at least return to President Clinton's 39.6% rate, which would result in a 55% top tax rate.

As Social Security stands today it is a pay as you go system, meaning that current benefits are paid by current FICA receipts. When the system is running in surplus, as it currently is, the remaining funds are deposited into the Federal Government's General Account in exchange for unmarketable interest bearing certificates issued at below market interest rates. Those bonds will be paid off by future tax receipts, they are by definition a call on America's future income. I generally shun the government/household economic comparisons that are often made concerning deficit spending (governments are not humans thus they generally will not retire, get sick, move, etc.) but the Social Security fund's surplus situation makes for an exception to that rule: to view the surplus fund as "savings" is similar to viewing payment of one's Visa bill as "savings". The funds in that surplus account, it is quite literally a file cabinet (Al Gore described it as a "lock box") full of Treasury Certificates in Washington DC, are spent today with a promise to be paid back with interest at some point in the future. They can only be paid back by the tax payers or lenders of the future.

When politicians talk about Social Security they discuss the same two options with some variations, a decrease in benefits and an increase in taxation, it would seem that the only way to avoid increasing taxes and/or decreasing benefits is to increase the population of tax payers. What is rarely discussed is the idea of increasing the size of the economy enough to allow payment of future benefits. That is a goal that cannot be achieved (all else remaining the same, which never happens) by taking capital from the job creating private sector and giving it to the government.

Senator Obama's suggestion to raise tax rates more than 15% on top earners was accompanied by a very helpful example, Senator Obama used the example of investor Warren Buffett. The Senator complained that the Federal Government should get another 15 1/2% of the $46 million that Mr. Buffett recently declared as his yearly income. Now call me crazy but I believe that the citizens of the United States would be better off in both the short and the long runs if Mr. Buffett invested the $7,130,000 in question into companies that could very well be employing people twenty years from now who will pay off the Social Security obligations that we are incurring today rather than pouring that money into the black hole of the Federal Government's General Account.

If Senator Obama, and the rest of the Democratic Presidential contenders actually believe that America is better off with the $7 million in question being spent by our profligate federal legislatures rather than being invested by Warren Buffett then they should take the time to honestly explain why they hold such a view. If they believe that Mr. Buffett would do more with that $7 million than our government then they should reconsider all of their economic thinking.

Update: Flying Debris commented on Mr. Buffett's subsequent comments concerning his tax bill here.

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