For causes I’ll get to in a second, I used to be actually struck by the title of this wonderful, necessary new paper by my CBPP colleague Kathleen Romig: Increasing Payroll Taxes Would Strengthen Social Security.
It is nicely understood that Social Security’s financing wants shoring up; we’ve been drawing down the belief funds to satisfy present obligations and by 2034 the funds shall be exhausted. That’s typically mistakenly taken to imply that Social Security will not pay out advantages, which in fact is improper: 86 % of its revenue comes from payroll taxes, which can proceed to help this system, permitting it to pay about three-fourths of scheduled advantages in 2035 and past. To be clear, that may be a completely unacceptable end result, and one which could possibly be–have to be–prevented utilizing Romig’s roadmap. She is completely right when she describes, opposite to the hysteria I typically hear on this concern, that Social Security’s shortfall is “significant, though manageable.”
In reality, the shortfall quantities to 1 % of GDP over the subsequent 75 years. So how can we shut that hole? Much of the answer should contain growing the payroll tax income that, as famous, is the mainstay of this system’s funding.
Romig’s key argument is that such a rise is justified by current developments: “Social Security’s tax base has eroded since the last time policymakers addressed solvency in 1983, largely due to increased inequality and the rising cost of non-taxed fringe benefits, such as health insurance.”
But Americans wouldn’t stand for reversing that erosion by way of paying extra into this system, proper? In reality, Romig notes that “…the majority of Americans oppose cuts to Social Security and support strengthening the program by contributing more in taxes.” Other than Medicare, there could also be no different authorities program that has this type of help. So we should always faucet it.
To achieve this, she suggests three revenue-enhancing modifications:
- Increasing or eliminating Social Security’s cap on taxable wages. The present wage cap on payroll taxes is now118,500 a yr. “Raising the cap would help mitigate the erosion of Social Security’s payroll tax base caused by rising wage inequality. Most workers’ taxes would not change…changes to the tax cap could close roughly a quarter to nearly nine-tenths of Social Security’s solvency gap, depending on how they were structured.”
- Expanding compensation topic to Social Security payroll taxes. This can be an enormous change, however a worthy and a progressive one. The play is “to include fringe benefits such as employer-sponsored health insurance and flexible spending accounts. Fringe benefits are a growing slice of compensation, and including them in Social Security’s tax base would eliminate the discrepancy between those who receive fringe benefits and those who don’t. Affected workers — who would disproportionately be lower- and middle-income — would pay more in taxes but also receive more in Social Security benefits. Including employer-sponsored health insurance premiums could close over one-third of Social Security’s solvency gap; including other fringe benefits could close [another] one-tenth.”
- Increasing Social Security payroll tax charges. As different aged wonks will keep in mind, this wouldn’t be the primary time the speed was elevated, because the early 1980s fee headed by that wild-eyed radical Alan Greenspan additionally really helpful numerous income boosters that became law in 1983. “Increasing rates alone could close the entire solvency gap; even a modest change, such as a gradual increase of 0.3 percentage points each for employees and employers (or less than3 per week for an average earner), could close about one-fifth of the gap.”
The two figures under present the extent to which the compensation base of this system has eroded, due partially to rising earnings inequality pushing a bigger share of earnings above the payroll cap. Note first how that complete quantity of compensation has drifted concerning the taxable earnings base. The base for the payroll tax was three-quarters of complete compensation; now it’s about two-thirds.
There are two essential causes for that: greater inequality and the truth that an growing share of compensation goes to well being care and different fringes which are outdoors the payroll tax base.
The earnings inequality drawback is obvious within the subsequent determine. The final time we addressed the shortfall, the payroll tax coated 90 % of earnings. Now it covers solely 82 %.
It is usually stated that there are three legs to the retirement-security stool: financial savings, pensions, and Social Security. In benighted DC discussions, Social Security is usually derided because the shakiest leg. In reality, it’s the firmest, as many years of wage stagnation and danger shifting (each the shift from defined-benefit to defined-contribution pensions and the straightforward shedding of pension plans) have undermined the opposite two legs.
Romig’s huge three concepts are nice methods to make the strongest leg of the stool even stronger, by way of broadening the bottom to right the elements chargeable for its erosion. Yes, that’s a tax improve, which is why I used to be struck by the boldness of her title. We are in an period the place even the Democratic candidate for president won’t suggest tax will increase on any however the prime 5 %; the place we’re someway imagined to fund our transportation infrastructure on a fuel tax that’s been frozen in nominal phrases since 1993.
It is simply in magical lands that we will get what we would like and wish with out paying for it. In the actual world, that is the best way ahead, and kudos to Romig (and CBPP) for saying so.
This publish initially appeared at Jared Bernstein’s On The Economy weblog.
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