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It’s A Raid!

How Barack Obama will shortchange the Social Security system.

By 10.24.08

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"The only way to fix the (Social Security) system is to bring more money in or send less money out," Barack Obama said at a Quincy, Illinois town hall meeting on April 18, 2005, according to the Quincy Herald-Whig.

At the time, the state's newly minted U.S. Senator was making one of the most prevalent Democratic arguments against President Bush's proposal to give workers the option of investing a portion of their payroll taxes in personal accounts. As the Herald-Whig article (linked to on Obama's U.S. Senate website) put it, "Obama said President Bush's plan to create private retirement accounts by siphoning away money from Social Security would cause the very crisis that Bush and his allies say they're fighting to avoid."

More than three years later, Obama still remains fiercely opposed to personal accounts -- but he's no longer concerned with siphoning away money from the nation's retirement system. Lost in all the controversy surrounding Obama's pledge to cut taxes on 95 percent of Americans is the fact that his proposals would drain hundreds of billions of dollars from government coffers that would otherwise be available to pay out benefits to retirees.

Last week, I asked Brian Deese, an Obama economic adviser, to explain the rationale behind the campaign's claim to cut taxes on 95 percent of Americans. As critics of the plan have pointed out, more than a third of Americans pay no income taxes, and thus his tax credits can easily be described as government handouts.

Deese responded to me by email, arguing that it was important to differentiate between income taxes that many people escape, and payroll taxes, which nearly every worker pays to fund Social Security and other entitlements.

"Obama’s Making Work Pay Tax Credit will directly cut taxes for 95% of all workers," he wrote, insisting that it would benefit all those with incomes under $150,000. The plan would "offset" the 6.2 percent employee payroll tax on the first $8,100 of income earned, according to the campaign, translating into as much as a $500 payment per individual and $1,000 payment per couple.

There's a persistent myth that the federal government actually has two bank accounts -- one that stores the payroll tax revenue left over after it makes payments to current Social Security beneficiaries, and a general bank account that funds remaining government services, mainly through income tax revenue. But practically speaking, since the federal government borrows from the Social Security system to help finance its deficit, all the money ends up in the same pot.

In other words, the smoke and mirrors routine surrounding Obama's tax proposal has been conjured up just so that the Obama campaign can make the dubious claim that its plan would "still preserv[e] the important principle of a dedicated revenue source for Social Security."

Of course, "principle" is the operative word.

Here's the problem. If the Obama campaign wants to pretend that it would preserve the idea of having two bank accounts, it means that workers will pay their payroll taxes throughout the year and their money will be deposited in the Social Security system. Only after the fact will they receive "tax credits," but those will be paid out of income tax revenue -- and thus, to paraphrase Obama, they'd be spreading the wealth around. (Again, because more than a third of Americans do not pay income tax, but 95 percent would be receiving checks from the Obama administration.)

However, if we accept the Obama campaign's argument that it is actually cutting payroll taxes, then it has to bear responsibility for the fact that it will be hemorrhaging money from the Social Security system as a result. Over 10 years, the "Making Work Pay" credit will cost $710 billion, according to a Tax Policy Center analysis that has been cited by the Obama campaign. Whatever happened to the Obama who said that "the only way to fix the (Social Security) system is to bring more money in or send less money out"?

It's true that Obama has also proposed raising payroll taxes on those making over $250,000 a year. But those changes, which wouldn't make up for the $710 billion, are already supposed to help deal with the looming crisis caused by the retirement of Baby Boomers (although they wouldn't be enough to make a serious dent in that, either). To top it off, such changes would not be enacted for 10 years, according to Obama -- well after he'd be out of office even were he to serve two terms.

When President Bush proposed allowing individuals to divert some of their payroll tax contributions into private accounts, liberals blasted the plan as a fiscally reckless idea that would bankrupt Social Security, and they frightened senior citizens into believing that it meant their benefits would be taken away. Obama has been engaging in the same type of dishonest fear mongering on Social Security during the presidential race.

But while the creation of personal accounts would lead to a revenue shortfall in the immediate term, over time, it would reduce obligations to future retirees who opted out of the current Social Security system. Obama's plan would produce a revenue shortfall as well, but it wouldn't do anything to reduce the nation's long-term entitlement obligations.

Obama has benefitted from the fact that an esoteric debate on his tax plan is beyond the attention span of most voters. But if his disingenuous claims do one thing, they should expose liberal hypocrisy on the Social Security issue once and for all.

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Philip Klein is The American Spectator's Washington correspondent. You can follow him on Twitter at: http://twitter.com/Philipaklein