For motives I will get to in a moment, I was really struck by the title of this outstanding, crucial new paper by my CBPP colleague Kathleen Romig: Growing Payroll Taxes Would Strengthen Social Security.
It is properly understood that Social Security’s financing requirements shoring up we’ve been drawing down the trust funds to meet existing obligations and by 2034 the funds will be exhausted. That is frequently mistakenly taken to imply that Social Safety will no longer spend out rewards, which of course is wrong: 86 percent of its revenue comes from payroll taxes, which will continue to help the program, allowing it to spend about 3-fourths of scheduled advantages in 2035 and beyond. To be clear, that is a entirely unacceptable outcome, and a single that could be–must be–avoided employing Romig’s roadmap. She is completely appropriate when she describes, contrary to the hysteria I often hear on this issue, that Social Security’s shortfall is “considerable, though manageable.”
In truth, the shortfall amounts to 1 % of GDP more than the subsequent 75 years. So how can we close that gap? Much of the resolution will have to involve increasing the payroll tax income that, as noted, is the mainstay of the program’s funding.
Romig’s important argument is that such an increase is justified by current trends: “Social Security’s tax base has eroded considering that the final time policymakers addressed solvency in 1983, largely due to enhanced inequality and the increasing price of non-taxed fringe benefits, such as wellness insurance.”
But Americans wouldn’t stand for reversing that erosion by way of paying more into the system, proper? In reality, Romig notes that “…the majority of Americans oppose cuts to Social Security and assistance strengthening the system by contributing far more in taxes.” Other than Medicare, there may possibly be no other government system that has this type of help. So we ought to tap it.
To do so, she suggests three income-enhancing adjustments:
- Growing or eliminating Social Security’s cap on taxable wages. The current salary cap on payroll taxes is now118,500 a year. “Raising the cap would assist mitigate the erosion of Social Security’s payroll tax base brought on by rising wage inequality. Most workers’ taxes would not modify…changes to the tax cap could close roughly a quarter to almost nine-tenths of Social Security’s solvency gap, based on how they have been structured.”
- Expanding compensation subject to Social Safety payroll taxes. This would be a big modify, but a worthy and a progressive one. The play is “to include fringe benefits such as employer-sponsored health insurance and versatile spending accounts. Fringe rewards are a developing slice of compensation, and including them in Social Security’s tax base would eliminate the discrepancy amongst these who get fringe positive aspects and these who don’t. Affected workers — who would disproportionately be reduced- and middle-earnings — would pay more in taxes but also obtain much more in Social Safety rewards. Such as employer-sponsored wellness insurance premiums could close over one particular-third of Social Security’s solvency gap such as other fringe positive aspects could close [another] a single-tenth.”
- Growing Social Safety payroll tax prices. As other aged wonks will keep in mind, this would not be the very first time the rate was enhanced, as the early 1980s commission headed by that wild-eyed radical Alan Greenspan also suggested various revenue boosters that became law in 1983. “Growing prices alone could close the whole solvency gap even a modest change, such as a gradual increase of .3 percentage points every for employees and employers (or much less than3 per week for an average earner), could close about 1-fifth of the gap.”
The two figures under show the extent to which the compensation base of the plan has eroded, due in portion to rising earnings inequality pushing a larger share of earnings above the payroll cap. Note very first how that total quantity of compensation has drifted about the taxable earnings base. The base for the payroll tax used to be three-quarters of total compensation now it is about two-thirds.
There are two primary motives for that: larger inequality and the fact that an increasing share of compensation goes to health care and other fringes that are outdoors the payroll tax base.
The earnings inequality difficulty is clear in the next figure. The final time we addressed the shortfall, the payroll tax covered 90 percent of earnings. Now it covers only 82 percent.
It is usually said that there are three legs to the retirement-security stool: savings, pensions, and Social Safety. In benighted DC discussions, Social Safety is often derided as the shakiest leg. In fact, it is the firmest, as decades of wage stagnation and risk shifting (each the shift from defined-benefit to defined-contribution pensions and the basic shedding of pension plans) have undermined the other two legs.
Romig’s big 3 suggestions are wonderful approaches to make the strongest leg of the stool even stronger, by way of broadening the base to right the aspects accountable for its erosion. Yes, that is a tax boost, which is why I was struck by the boldness of her title. We are in an era exactly where even the Democratic candidate for president will not propose tax increases on any but the top five % where we are somehow supposed to fund our transportation infrastructure on a gas tax that is been frozen in nominal terms because 1993.
It is only in magical lands that we can get what we want and want without having paying for it. In the genuine globe, this is the way forward, and kudos to Romig (and CBPP) for saying so.
This post initially appeared at Jared Bernstein’s On The Economy weblog.