July 17, 2014

THE EASINESS OF THE FIXES THWARTS REFORM:

The Hard Numbers on Social Security (WILLIAM A. GALSTON, July 15, 2014, WSJ)

 If we do nothing, the Social Security actuaries estimated last year, all Social Security reserves will be exhausted by 2033, after which revenues could cover only three-quarters of currently scheduled benefits.

To close that gap while maintaining scheduled benefits, we would need to enact an immediate increase in the payroll tax rate from 12.4% to 15.9%. For workers earning $50,000 a year, that would mean a tax increase of $900, nearly 2% of gross income. And employers would have to match it. For workers making the maximum now subject to payroll taxes (a bit under $120,000), taxes would rise by $2,100.

Because earnings covered by Social Security are capped, the payroll tax is steeply regressive: Higher-income earners pay a much lower rate than do those at lower levels. For a worker making $250,000, payroll taxes amount to only 5.9% of total earnings, less than half the rate of someone making $50,000.

Many people have proposed making the tax less regressive by bringing more of total income under the cap, and there is a historical basis for doing so. In 1983, when Congress averted insolvency in the system by enacting the recommendations of the Greenspan Commission, about 90% of total earnings fell under the taxable cap. Although that cap has risen in tandem with average wages ever since, increasing inequality in the distribution of earnings means that today only 83% of total wages are subject to the payroll tax. Restoring the ratio of three decades ago would mean doubling the maximum earnings subject to the tax to $241,600. For someone making the maximum, that would mean a tax increase of $7,600, with employers liable for the same increment. Numbers this large affect calculations about hiring and raises.

One might imagine that such a sizable increase in covered earnings would be enough to stabilize the system for the long term. In fact, the CBO calculates, it would reduce the imbalance by only 30%. Indeed, eliminating the cap and taxing all earnings would solve just 45% of the problem. If we stick with the current payroll-based funding system, any solution would have to involve an increase in the payroll tax rate as well.

Lifting the cap, raising payroll taxes, raising retirement agae and means-testing benefits gets you back to balance too easily for there to be much pressure for reformation.
Posted by at July 17, 2014 3:43 PM
  
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