Wednesday, May 04, 2005

Social Security Reform Saga - Part II

My previous post provided some basic background on Social Security financing. Here are some updated statistics from the Trustees Report, which was issued in March.

“The annual cost of Social Security benefits represents 4.3 percent of Gross Domestic Product (GDP) today and is projected to rise to 6.4 percent of GDP in 2079. The projected 75-year actuarial deficit in the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds is 1.92 percent of taxable payroll, up slightly from 1.89 percent in last year's report. The program continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2017 and will be sufficient to finance only 74 percent of scheduled annual benefits by 2041, when the combined OASDI trust fund is projected to be exhausted.”

The Trustees also state:
"Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 15 percent in the amount of payroll taxes or an immediate reduction in benefits of 13 percent (or some combination of the two). To the extent that changes are delayed or phased in gradually, greater adjustments in scheduled benefits and revenues would be required. Ensuring that the system is solvent on a sustainable basis over the next 75 years and beyond would also require larger changes."

Thus, in addition to expanding the labor base (an alternative discussed previously) increasing payroll taxes or reducing benefits are other alternatives. (Whether a change in benefit computations are “benefit cuts”, as those on the democratic side of the aisle want to call them, is another matter. More on this later.) A fifteen percent increase in the 12.4 percent in payroll taxes, if applied across the board to both employers and employees alike, would move that total tax rate up to 14.26 percent.

Such a tax increase would affect all workers earning at or below the base amount for social security income, which is currently at $90,000. Everyone with earned income would pay these higher rates, and if that option was chosen, everyone would have benefits as calculated in the system as currently structured. For someone earning $20,000, that would mean that the employee share (one half of the total) goes from 6.2 percent to 7.13 percent, or an additional $186. At $90,000, that is another $837. Of course, this also means similarly higher taxes on the employer side.

This method of increasing taxes has the appeal of taking something from everyone to support a common social program. Everyone covered by the system (with earned income) pays. We don’t single out particular groups and make them pay for all of it, as would be the case if we raised the wage base. Moreover, the effect of that change is modest, rather than an immediate change in marginal rates from zero to the applicable rate, as occurs as wage bases are expanded. (And you should note – the wage base expands through indexing each year – so the marginal taxes on those at the margins do indeed increase each year under the current system.)

However, some would say that this tax is regressive. If you earn $1 million, you are still paying $837 more with this tax increase, which is only .0837%, rather than .93% of your income. Keep in mind, however, that the tax is paying for benefits that are limited, rather than proportional to income. Those earning $1 million are not getting any more benefits than those that earn $90,000, and the benefits of those earning $90,000 are not three times the benefits of those earning $30,000. The system has a redistributional element to it, which makes it a better deal for the lower-earning folks than it is for the higher-earning folks.

More to come.

No comments: