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I spent Memorial Day with my savvy friend who keeps up on politics and economics. I also had dinner with another scholar. Both were shocked to hear that if Social Security doesn’t get extra revenues, the promised benefits we all expect to get will be cut by 25%. Those cuts will be even deeper for the people who depend on Social Security the most.
Fortunately, Congress is waking up—I am sorry to say the effort is almost all on the Democratic side—to make efforts to increase Social Security revenues to maintain benefits. Rep. John Larson (D-CT) and others are sponsoring the Social Security 2100 Act, which follows the basic principle in Public Finance 101—keep taxes low and expand the base .
Since the Larson bill will likely change and the other proposals will have variants on the same theme, I thought it would be helpful to describe the contours of the solutions. The Urban Institute’s 2015 paper on this topic is a good place to start to understand how we make Social Security solvent. The numbers would change with an update but not the magnitude. These are the two elements you want in a good Social Security solvency bill.
1. Increasing Payroll Taxes
Watch for payroll-tax rates, the so-called FICA taxes, to increase. Some bills would increase them by a little now or as needed when the trust-fund starts to be exhausted. The tax rates can be set high enough so that promised benefits, those scheduled in the law, would be paid as we all expect.
Under the Urban Institute’s particular calculation, the payroll tax rate increases from the present amount of 12.4% (which is split equally between the employer and employee) to as much as 15.4% over ten years. This hike would extend the solvency of Social Security to 2087—when the boomers are all but dead—at which point Social security is solvent. Schedule those tax hikes and we are good to go.
Since Social Security is actuarially funded, based on predictions about future liabilities and future revenues, assumptions about longevity improvements affect the course of necessary FICA tax hikes. If life expectancy continues to increase—and, sadly, current trends suggest that American longevity gains may have reversed—the payroll tax rate would need to increase in the distant future. But even if the FICA taxes need to rise to 17% or 18% of payroll, that is a relatively small number compared to social security contribution rates of over 25% in most rich nations.
2. Expanding the Base
Incomes over a certain threshold—currently $132,900—are not taxed by Social Security. Raising the cap on earnings subject to the Social Security payroll tax significantly improves solvency, though it doesn’t entirely eliminate the funding gap. Expanding the base still requires tax increases, but with higher contributions from the wealthy, the requisite tax hikes are much smaller. Expanding the base by eliminating the cap is attractive because because income inequality means that a lot of earnings have escaped the base.
Nearly 7% of workers have earnings above the wage cap. The Urban Institute predicted that if the cap was eliminated in 2016, full benefits could be paid until 2055. But raising the earnings cap could also be accompanied by higher Social Security benefits for high-wage workers, because more of their earnings would be covered by the program. If Congress did not increase high earners’ benefits proportionately, eliminating the cap would improve solvency even more.
Economically, Social Security is one of the easiest public policies to understand and implement. The tax increase is relatively large, but not a significant loss of well-being since the earned income tax credit often pays the tax for low earners. The math is easy. The politics are difficult. The necessity is unassailable.