The Democratic Debate Dilemma

The Democratic Debate Dilemma BY NILUS MATTIVE for Daily Reckoning

Right before last week’s Democratic debate, Elizabeth Warren revealed her plan to greatly expand Social Security.

And then, during opening remarks, Andrew Yang said he wanted to pay 10 Americans “freedom dividends” worth $1,000 a month as a way of demonstrating his larger plan to do the same thing for everyone in the country.

Now, both of these proposals are attempts to create larger social safety nets.

Both are also attempts to buy votes.

And both, in my opinion, miss the mark.

Let’s start with Elizabeth Warren.

The Headline Promise

Warren wants to pay all current and future Social Security recipients an extra $200 a month.

Promising seniors, the group of Americans who always vote come rain or shine, an extra $2,400 a year in Social Security benefits is a pretty good way to garner their support.

In addition, her plan:

  • Changes the measure of inflation used for Social Security adjustments to make it more tailored to what seniors experience
  • Provides Social Security credits to non-earning caregivers
  • Allows disabled widows and widowers to claim survivor benefits earlier
  • Creates special minimum benefit rules that would guarantee checks worth 125% of the federal poverty line
  • Finally, it allows public sector employees to avoid negative adjustments for various pension benefits

Warren would pay for all of these changes with two new taxes:

  1. A 14.8% combined payroll tax on all wages above $250,000
  1. A 14.8% net investment income tax for individual filers making $250,000+ and joint filers making $400,000+. (This is in addition to an existing 2.9% net investment income tax.)

For the vast majority of Americans, this tradeoff sounds pretty good – higher Social Security checks, a better safety net for some, and all the costs being paid by the highest 2% of earners.

Personally, the individual line items sound like a mixed bag to me.

But there are really two big objections to be considered here:

A Philosophical Shift

Social Security was never intended to be an overtly progressive program. So this proposal would represent a marked philosophical shift.

When Social Security was first instituted, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage.

Today, Social Security covers virtually everyone and the average American is living to age 76. Other features like disability insurance have also been added to the equation as well.

To accommodate this widening gap of money coming in and money going out, the initial payroll tax rate of 2 percent — which was and still is split between employer and employee — has already risen to a combined 12.4 percent.

But the idea was always providing a basic retirement benefit for all Americans … funded by their own contributions over time … with well-defined parameters on the top end (both maximum benefits and maximum contributions).

Warren’s plan is substantially different in spirit.

It places a lot more financial burden on a lot less people at the top of the income scale.

Whether you agree with her assessment that those people should bear the cost is up to you. That brings us to the second objection.

The Math Is Against Her.

It’s quite likely that Warren’s math wouldn’t pencil out in reality.

According to an analysis by Mark Zandi of Moody’s Analytics, Warren’s proposal would pay for itself and extend Social Security’s solvency out another 19 years.

Of course, one of the big assumptions is that wealthier Americans will take zero action to avoid the new taxes that Warren is proposing.

Newsflash: They will take actions to avoid the new taxes that Warren is proposing.

I have no idea to what extent or how, obviously.

But it’s foolish to think that America’s richest citizens won’t reconfigure their businesses … shift income sources … go through various legal restructurings … or use many other tactics to minimize the impact of these new policies.

Therefore, we can’t take any analysis at face value.

What About Yang’s Plan?

For someone who touts his ability at math, Yang’s proposal looks pretty ridiculous once you dig a little deeper.

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