Sunday, August 17, 2008

COMMENTARY:

During this electoral season, we’ve heard a lot about inequality and, separately, a lot about how America’s Social Security system needs reform. So it is unfortunate little has been said about one of the largest inequities in our tax system: Social Security taxes bear disproportionately on two-earner families.

Even more unfortunate - and ironic, given the Democratic Party’s rhetoric about improving women’s status - is that Sen. Barack Obama‘s proposal will only worsen this situation. Importantly, these inequities encourage behavior that harms the fiscal health of the Social Security system for households of any kind.



Take a family in which one spouse earns $50,000 and the other $70,000. Under the current system, this family and its employers contributes 18 percent more in Social Security taxes than a one-earner household making the same total.

Now, take a family in which each spouse earns $150,000 versus a one-earner family that makes $300,000. The former currently contribute double the Social Security taxes that the latter do. These inequities occur because the system generates contributions of 12.4 percent of any worker’s income up to $102,000.

Mr. Obama’s proposal is to create a “donut” whereby a Social Security tax is reinstated at household income of $250,000.At various times, this Obama proposal has been described as referring to household income while this week the campaign is using the terms “those making over $250,000.” Regardless of whether Mr. Obama is referring to household or individual income, the increase will inevitably worsen the inequity between two-earner households and other households.

The incentives engendered by this sort of inequity affect both the short-term and long-term health of Social Security. In some two-earner homes, one of the spouses - typically the woman - drops out of or significantly reduces her participation in the workplace to support the other spouse’s career. When that happens, we end up with lower contributions for current retirees. For those families in which both spouses remain working, the higher taxes leave less money for child care and household help, thereby discouraging production of children.

And because the Social Security system is funded entirely by current workers, this disincentive for children ends up decreasing the tax base for future Social Security recipients. Across the globe, high-tax Social Security systems have been followed by below-replacement fertility rates, creating financial turmoil for these systems.

Perhaps ironically, proposals for young people to invest a portion of their Social Security taxes in individual accounts tend to be fairer to two-earner households. At least when these families are double-taxed, they can convert some portion of those taxes into personal accounts.

Republicans haven’t exactly been touting a line of gender-equity to promote these accounts, but that feature is there, nevertheless. Other types of equitable solutions are possible. But so far, the Democrats have not made a substantial attempt to develop one.

Some will say we shouldn’t worry about the inequities in the system because they only affect “rich people,” which under the current system means the approximately 19 percent of households already making more than $102,000 (plus anyone who would be induced to become part of such a household under a more equitable system). Of course, these are the same sorts of people who originally called the Alternative Minimum Tax a great idea without thinking through how it would affect the average American over time.

Any “fix” or reform to Social Security needs to be cognizant of the effects the reform will have on the incentives for potential workers in the future and - unless we were to move toward individual accounts in a much more radical way than Sen. John McCain has suggested - for couples to have children.

Both Mr. Obama and Mr. McCain claim they are interested in attracting the votes of women. Thinking through the implications of Social Security taxes for women and the choices they face about childbearing and work-force participation would be a great place to start. Moreover, only by thinking through these incentives carefully will we achieve a fiscally sound Social Security system.

Brandice Canes-Wrone is a professor of politics and public affairs at Princeton University’s Woodrow Wilson School.

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