Barack Obama’s Remarks on Retirement Security

Below is the prepared speech given by Senator Obama on Retirement Security. Obama’s Retirement Plan is essentially this:

  • No Privatization
  • Address the coming Social Security funding gap not by reducing benefits or changing the retirement age but rather by eliminating the cap on taxable social security wages. Currently, the Social Security payroll tax only applies to the first $102,000 a worker makes. Senator Obama proposes to adjust the cap on the payroll tax so that “people like him” pay a little bit more.
  • Eliminate income taxes for any retiree making less than $50,000 per year. This would completely eliminate income taxes for 7 million seniors, providing a savings of $1,400 per person each year.
  • Senator Obama would limit circumstances when retirement benefits can be cut, and increase the wages and benefits that workers can claim in bankruptcy court.
  • Automatic workplace pensions. “There will be no red tape or complicated forms – employers will provide a direct deposit of a small percentage of each paycheck into your account. You can add to it, or you can opt out at any time. And employers will have an easy opportunity to match employee savings. If you switch jobs, your savings will roll over into your new employer’s system. If you become self-employed, you will control your account.”

Overall, I have few criticisms of this plan, but let’s address each point individually.

1. No Privatization. Personally, I was in favor of the privatisation-type efforts that President Bush proposed. Essentially, I’m in favor of some sort of opt-out of the present system. I don’t have a real strong opinion on it though and realize that its probably not going to happen.

2. Eliminate the Cap. I am in favor of this proposal. The Social Security system will begin to run deficits as the Baby Boomers retire. Its an issue that’s fairly easily solvable by either increasing taxes or reducing benefits. But it is also something that is better addressed sooner rather than later.

For 2008, the employee’s share of the Social Security portion of the tax is 6.2% of gross compensation up to a limit of $102,000 of compensation. The employee’s share of the Medicare portion is 1.45% of wages with no limit. The employer is also liable for separate 6.2% and 1.45% Social Security and Medicare taxes, respectively, making the total Social Security tax 12.4% and the total Medicare tax 2.9% of wages.

The Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more in payroll taxes than they do in income taxes. Because the tax on social security (but not medicare) is capped at $102,000, the Social Security tax is a regressive tax. A person who wearns $102,000 will pay exact same tax as someone who earns $204,000. Or $1.02 million. This is of course different than the regular income tax system where tax rates go up as you climb the income ladder.

3. Don’t tax the first $50k for seniors. I disagree with this proposal. I don’t understand why we would treat the elderly more favorably than any other person earning less than $50k a year. This is especially true when you consider that seniors are already not paying the FICA taxes on this income that an ordinary worker is. If we’re going to reduce taxes on someone in the lower income strata, shouldn’t it be on the younger generations who are still working at building their lives?

4. Bankruptcy Reform. I would have to see exactly what this proposal is before making a decision. The way the bankruptcy system currently works, employee’s receive a “first bite” at the company’s assets in bankruptcy, but only up to a fairly low dollar amount of about $10,000. Generally, this is enough for them to receive all of their day-to-day wages, but, if the pension is underfunded like most big company pensions are, then they will not receive the entirety of the pension claims.

Probably what he’s talking about is increasing the pension benefits cap. I generally don’t have an issue with this but I think that Pension Benefit Guarantee Company reform would be better. Forcing companies to more accurately account for pension liabilities. But that’s probably not politically possible.

The main thing that must be understood however is that in a global economy like this, the “defined-benefit” pension plans that companies instituted after World War II are no longer viable. Defined benefit plans are different than your 401(k) plan. Its what the autoworkers get. Its what the steel workers got. IBM, GE. Railroads and airlines. Its a system that is not relevant to my generation.

I’m fine with protecting pensions in a limited way. But pension liabilities are a large reason why these companies file for bankruptcy in the first place. United can’t compete with Southwest because Southwest doesn’t have the legacy retirees that United has. The same goes for GM and Ford in their competition with Toyota. Long ago, these companies and their workers made bargains that, today, might be untenable in a global economy. They all made a choice to defer compensation for later. It was a risk that they may or may not receive the benefit of.

5. Automatic Opt-in. I don’t necessarily like how Obama phrased this one, and so I’ll withhold full approval of this idea. But I think he’s got it right. Essentially, this proposal is based upon recent realization about human nature. Currently, most employees are required to opt-in to participation in their 401(k) plans (i.e., you don’t contribute to your 401(k) unless you fill out all the paperwork). Many employees never do so or wait for years before participating.

Automatic enrollment provisions like the type Obama seems to be endorsing enroll the employee in the 401(k) unless they affirmatively opt out. Automatic enrollment has been shown to increase average national participation rates from 75 percent to between 85 and 95 percent. Among newer female employees, such programs increase participation rates from 35 percent to 86 percent and among newer employees with annual earnings less than $20,000, from 13 percent to 80 percent.

Proposals like this go a long way towards “privatizing” at least some part of the overall retirement system and I applaud that.

Overall. I’ll withhold final judgment on these proposals until I have a chance to review McCain’s plan. I like some aspects of it and dislike others.

Here is Barack Obama’s Retirement Security Plan. The text of his speech is below.

Gresham, Oregon
May 18, 2008

As Prepared for Delivery

Americans who work hard their entire lives have earned the right to retire with dignity and security. That’s the promise that each of us wants to be realized within our own families, and it’s a promise that we must keep for all American families.

For generations, Washington worked to protect that promise for working people. That’s the promise that my grandparents knew, even though they came of age in the Depression. My grandfather would go on to serve in Patton’s Army, and my grandmother worked on a bomber assembly line. When they set out west from Kansas to build their lives after the War, they did so with the confidence that Washington would help them reach a secure retirement. That was the promise that FDR made, and it was a promise that Washington kept for decades while folks like my grandparents moved through the ups and downs of life in America’s middle class.

But today, Washington is not working to preserve this fundamental part of the American Dream. A secure retirement is no longer a guarantee for the middle class. It’s harder to save and harder to retire. Pensions are getting crunched. The promise of social security may grow harder to keep. That’s why I will fight every day to extend the promise of a retirement that is dignified and secure when I am President of the United States.

It starts with protecting Social Security today, tomorrow, and forever. For millions of Americans, Social Security is the difference between a comfortable retirement and the risk of poverty. We have an obligation to secure the future of one of the most successful programs in our history. That starts with talking straight to the American people about the challenges that lie ahead.

Social Security is strong, but as more baby boomers retire, the long-term cash-flow needs to be addressed. We have to make sure Social Security is there for future generations.

Now we already know what the Republicans will be running on. John McCain has already said that he supports private accounts for Social Security – in his words, “along the lines that President Bush proposed.” Let me be clear: privatizing Social Security was a bad idea when George W. Bush proposed it. It’s a bad idea today. It would cost a trillion dollars to implement at the front end, and would put the retirement plans of millions of Americans at risk on a volatile Wall Street. That’s why I stood up against this plan in the Senate, and that’s why I won’t stand for it as President.

But Senator McCain’s campaign went even further a few weeks ago, suggesting that the best answer to the growing pressures on Social Security might be to cut cost-of-living adjustments or to raise the retirement age. I think there is another option that is fairer to working men and women. We have to protect Social Security for future generations without pushing the burden on to seniors who have earned the right to retire in dignity.

Here’s my plan. Right now, the Social Security payroll tax only applies to the first $102,000 a worker makes. I think the best way forward is to adjust the cap on the payroll tax so that people like me pay a little bit more and people in need are protected. That way we can extend the promise of Social Security without shifting the burden on to seniors. And we should include what’s called a “donut hole” to make sure that this change doesn’t ensnare any middle class Americans.

But Social Security is not enough. More and more seniors are struggling with the cost of everything from gas to groceries, and we know that rising costs are hardest for folks on fixed incomes. That’s why I’ll make retirement more secure by eliminating income taxes for any retiree making less than $50,000 per year. This would completely eliminate income taxes for 7 million seniors, providing a savings of $1,400 per person each year.

And it’s time to end the outrage of CEOs cashing out while workers lose their pensions. Right now, bankruptcy laws are more focused on protecting banks than protecting pensions. That’s not fair. That’s not the America that I believe in. It’s time to stop cutting back the safety net for working people while we protect golden parachutes for the well-off. If you work hard and play by the rules, then you’ve earned your pension. If a company goes bankrupt, then workers need to be our top priority – not an afterthought.

I fought against a bankruptcy bill in the Senate that did more to protect credit card companies and banks than help working people. And as President, I’ll limit circumstances when retirement benefits can be cut, and increase the wages and benefits that workers can claim in bankruptcy court. We’ll require companies to disclose their pension fund investments. We’ll put an end to the outrage of executives getting bonuses while workers watch pensions disappear. And we’ll make sure that no American goes bankrupt just because they get sick.

Finally, we’re not going to help folks reach retirement unless we encourage savings. But today, personal savings is at an all-time low as Americans are dealing with higher costs and a credit crunch. Meanwhile, 75 million working Americans don’t have employer-based retirement plans.

That’s why I’ve proposed automatic workplace pensions. There will be no red tape or complicated forms – employers will provide a direct deposit of a small percentage of each paycheck into your account. You can add to it, or you can opt out at any time. And employers will have an easy opportunity to match employee savings. If you switch jobs, your savings will roll over into your new employer’s system. If you become self-employed, you will control your account. Studies show that about 80 percent of Americans will enroll if given the option to pursue my plan. This will put a secure retirement within reach for millions of working families.

Since the New Deal, we’ve had that basic understanding in America. If you work hard and pay into the system, you’ve earned the right to a secure retirement. That’s the promise that was kept for my grandparents and Michelle’s parents, and for so many families here in Oregon and across the country. But in George Bush and John McCain’s Washington, the message to the middle class is: “you’re on your own.”

Well I’m running for because we must be the country where we say that we’re all in this together. We can do this. We can come together to keep America’s promise – not just for this generation of seniors, but for our children and our grandchildren. That’s a principle worth fighting for. And with your help, that’s what I will do every day when I am President of the United States of America.
Barack Obama is a Democratic Senator from Illinois and a candidate for the Democratic presidential nomination.

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