#1 - Raising Taxes Isn't the Answer to Fixing Social Security

 

Starting in fifteen years time (2017), Social Security will begin paying out more in benefits than it receives in taxes.

Reformers have proposed privatizing Social Security by allowing workers to invest a portion of their payroll taxes in individual retirement accounts. In contrast, critics of privatization have offered few detailed proposals of their own for addressing Social Security's impending financial crisis.

Some critics of privatization argue that the answer is to simply increase the Social Security payroll tax to cover the future deficits. However, doing so would mean that the current 12.4% payroll tax would have to increase to 17% by 2035 and would need to increase even further after 2050.1

Covering the cost of benefits after 2017 through the payroll tax would mean that each worker would need to pay additional Social Security taxes of: $579.91 in 2020, $1,121.66 in 2025, $1,543.04 in 2030 and $1,781.23 in 2035.2

When Congress last increased payroll taxes in 1998 and `1990 (by only 1 percentage point, from 11.4% to 12.4%), the estimated effects were the elimination of 510,000 jobs and a reduction in the US GDP of $30 billion.3

Another major problem is that such tax increases would fall heaviest on low-income workers, who are least able to afford them.

An alternative suggestion by critics of privatization is to leave the payroll tax at its current rate of 12.4% but apply the tax to wages above the current cap of $80,400. While this would only affect higher-income workers, it would mean that many of those workers would be paying over half their income in federal taxes alone. It would also reduce the rate of U.S. economic growth by 2-3 percent and result in the loss of $136 billion of economic activity and 1.1 million jobs over the next 10 years.4


Footnote:

1 O'Neill, June, "The Trust Fund, the Surplus and The Real Social Security Problem," The Cato Institute, SSP No. 26, April 9, 2002. This paper can be found at: http://www.socialsecurity.org/pubs/ssps/ssp26.pdf.

2 Tanner, Michael, "No Second Best: The Unappetizing Alternatives to Social Security Privatization," The Cato Institute, SSP No. 24, January 29, 2002. This paper can be found at: http://www.socialsecurity.org/pubs/ssps/ssp24.pdf.

3 Robbins, Aldona and Robbins, Gary, "Effects of the 1988 and 1990 Social Security Tax Increases," Institute for Research on the Economics of Taxation, Washington, 1991.

4 Wilson, D. Mark, "Removing Social Security's Tax Cap on Wages Would Do More Harm Than Good," Heritage Foundation Center for Data Analysis Report no. 01-07, October 17, 2001. This paper can be found at: http://www.heritage.org/library/cda/cda01-07.html

 

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