The American Spectator

Special Report

(Page 2 of 3)

But Barack Obama says no, he would not even leave workers free to make their own choices. He is still back there with Otto von Bismarck in 1889.

Instead Obama mocks the idea of such worker prosperity. He says, referring to recent stock market declines, "Imagine if your security now was tied up with the Dow Jones. You wouldn't feel very confident about the security of your nest egg." Even though Obama himself owns substantial retirement investments through the Federal Thrift Savings Plan, when it comes to average working people, such investment is just too risky.

The huge gains available to workers through the accumulation of real investment returns leaves plenty of leeway for occasional downturns. Moreover, workers would be free to choose to forego personal accounts and rely on the old Social Security framework if they prefer. In addition, workers with personal accounts are not required to invest in the stock market. They could just invest entirely in bond funds or other more stable investments.

BUT THE RYAN-SUNUNU BILL had another answer to Obama. It provided for a government guarantee that all workers with personal accounts would get through the accounts and their continuing Social Security benefits at least as much as promised by Social Security under current law. So the bill maintained the current safety net provided by Social Security in full. This is feasible because market investment returns are so much higher than Social Security can even promise that workers with such accounts are quite unlikely to end up needing the benefit guarantee. This follows exactly the model in Chile, where all workers with personal accounts were guaranteed a minimum benefit equal to 40% of pre-retirement income, which is actually a bit more than Social Security in America currently promises to average income workers.

Obama says that personal accounts "would eventually cut guaranteed benefits by up to 50%." But the Ryan-Sununu guarantee shows that this is completely wrong. Indeed, the bill provided for no cuts in promised Social Security benefits even for those who refused the personal account option.

When the Chief Actuary of Social Security scored the Ryan-Sununu bill, he concluded that the proposed personal accounts were such a good deal that all workers would choose them. This is why the bill did not need to include any benefit cuts, or tax increases, for anyone.

The Chief Actuary also concluded that the personal accounts would eventually take over so much of the burden of paying for Social Security benefits that the bill would achieve full solvency for Social Security, completely eliminating all long-term deficits, even though it did not cut benefits, or raise taxes, for anyone. Instead of Social Security payroll taxes eventually climbing from a total of 12.4% of wages today to close to 20% or more to pay all promised benefits, the payroll tax under Ryan Sununu would eventually decline to 4.2%, enough to continue payment of all promised disability benefits. This is the largest tax cut in world history.

The Chief Actuary also found that after just the first 15 years with the Ryan-Sununu personal accounts, workers would have accumulated $7.8 trillion in today's dollars in the accounts. After just the first 25 years, workers would have accumulated $16 trillion, again in today's dollars, double the size of the entire mutual fund industry today. This is broader worker ownership than could ever be achieved through Obama's socialist economics.

BUT OBAMA THINKS he has a better idea -- raise taxes on the rich! Now ain't that special.

Obama proposes to impose the full Social Security payroll tax on everyone earning over $250,000 per year. He said last week that it is unfair for the middle class to pay Social Security taxes "on every dime they make," while millionaires and billionaires pay the tax on only "a very small percentage of their income."

The Social Security payroll tax has always been paid on wages up to a maximum annual taxable income limit, which now automatically grows each year with the average growth in wages. For 2008, the maximum taxable income is $102,000, meaning workers and their employers do not pay taxes on wages above that income limit.

About 10% to 15% of workers exceed the maximum taxable income each year. But while workers do not pay taxes on income above that limit, they also receive no benefits based on that income. Benefits are calculated under a formula based on income earned each year. So there is no unfairness involved in the income limit. Once workers have provided for enough retirement income through Social Security to provide a basic foundation for retirement, no one has ever thought that they need to be required to pay more into the system. Providing for additional benefits is left up to each family. Indeed, Social Security pays a negative effective real return for workers around the maximum taxable income, so requiring them to pay still more and reduce that effective return further would be rapacious.

Such a tax increase policy, moreover, leaves workers without all of the enormous advantages of personal accounts discussed above. Working people would still be suffering with the poor deal offered to them by the program today. They still have to waste the enormous payroll taxes they and their employers pay, more than the income tax for most workers, on a tax and redistribution system rather than a highly productive savings and investment system.

In addition, this proposed tax increase needs to be seen in the context of the rest of Obama's tax increase proposals. He has proposed to raise the rate of every significant Federal tax. He has proposed to raise the top rate of the individual income tax from 35% to almost 40%. The Social Security tax increase proposal would add another 12.4% to the top marginal tax rate. He has proposed to raise the capital gains tax rate by somewhere between 33% and 100%. He would almost double the tax rate for dividends. He has proposed to reinstate the death tax in full. He would raise taxes on corporations as well. All of these tax increases would be used to massively increase Federal spending, eventually by over a trillion dollars a year.

Is this likely to raise our sluggish economy out of the doldrums and bring back robust economic growth? Or is it more likely to tank our economy further? Amity Shlaes, author of The Forgotten Man, which provides a new history of the Roosevelt era, points out that in proposing to sharply raise marginal tax rates and adopt protectionist trade restrictions, Obama has the exact same policies that transformed the 1929 downturn into The Great Depression.

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Taxes, Trade, John McCain, Barack Obama, Economics, Business, Social Security, Books, Law