The Social Security trustees report—now what?

As I wrote in an earlier blog, Social Security’s projected shortfall is around 20 percent larger than last year, though still less than one percent of GDP over the 75-year projection period. This doesn’t change the basic story that costs are rising from around 5 to 6 percent of GDP before leveling off after the Baby Boomer retirement, with costs at the end of the period slightly lower as a share of GDP than in the peak Boomer retirement years.

Raising Social Security taxes on both employers and workers from 6.2 percent to around 7.6 percent would close the projected shortfall.1 But there are better ways to raise the necessary revenue. The fairest and simplest is eliminating the cap on taxable earnings, which is currently set at $110,100. Though people pay income and Medicare taxes on all earned income (and will soon pay Medicare tax on unearned income as well), earnings above $110,100 aren’t subject to Social Security tax. Scrapping the cap would close 71-87 percent of the shortfall, depending on whether or not you increase benefits for high earners to reflect their higher contributions. Other no-brainers include covering newly-hired public-sector workers who currently aren’t in Social Security (closing 6 percent of the shortfall) and subjecting Flexible Spending Accounts and other salary-reduction plans to Social Security taxes (closing 9 percent).

Another option that has more mixed support among Social Security advocates is gradually increasing the contribution rate to offset increases in life expectancy. This would increase taxes very slowly—by 0.01 percentage points per year, much more slowly than projected wage growth—and would close around 15 percent of the shortfall if the increase began in 2025, after the gradual increase in the normal retirement age from 65 to 67 had been fully implemented. The advantage of this option is that it might take the issue of life expectancy, a favorite of Social Security alarmists, off the table. The disadvantage is that everyone would pay more, even low-income workers and others who’ve seen little or no increase in life expectancy. It’s also worth noting that it doesn’t raise that much money, because, contrary to myth, rising life expectancy is a relatively small factor in the emergence of the projected shortfall. A much bigger factor is slow and unequal wage growth, which has increased corporate profits and pushed a growing share of earnings above the cap, eroding Social Security’s tax base (see chart).


Source: Social Security Administration

Putting these together—scrapping the cap, covering public sector workers, taxing FSAs, and offsetting life expectancy through a gradual increase in the contribution rate—would be more than enough to close the projected shortfall. You can come up with your own plan by looking at the first column of figures in the table starting on p.8 here and dividing by 2.67 (the projected shortfall expressed as a share of payroll).

Thanks to blog reader “Susan” and my friend Liz, whose questions prompted this follow-up post.

Endnotes

1. The combined increase (1.4 percent multiplied by two, or 2.8 percent) is slightly more than the size of the actuarial deficit measured as a share of payroll (around 2.7 percent) because some compensation would likely shift to untaxed benefits. This measure also conservatively assumes the trust fund should have enough at the end of the period to pay for a year of benefits without additional contributions, even though Social Security is primarily a pay-as-you-go program. Strictly speaking, the unfunded obligation is closer to 2.5 percent of payroll according to the trustees report.


  • http://globalglassonion.blogspot.com/ rjs0

    we could also raise the minimum wage to $10 & get back to full employment – that would also close the fiscal deficit gap & put a floor under the housing market…sometimes the simplest solutions arent so obvious..

  • benleet

    I recall that in the 1980s 90% of wage income was subject to SS tax, today only 82% or is it 81%, as incomes to the top earners has increased. As you say, eliminating the cap would eliminate 71 to 87% of the shortfall? Since 1979 to 2007 the distribution of income has changed, according to CBO report “Trends in Household Income Distribution Between 1979 and 2007″ — the top one percent, after all taxes and transfers, increased its income share from 8% to 17%, and the 9% shift all came from income shares of lower-earning 80% of households. Also, wage income as a share of GDP has fallen from 53% to 43% in the last 40 years. I looked at the Tax Policy Center data, also published in State of Working America, 2006-2007, page 69, I think, the portion of all income earned by the lower-earning 80% in wage income was 28.2% of all income. Is that a reasonable reward for labor? Only if you think the market is fair. I don’t. The Social Security Ad. shows that out of 150 million workers, 75 million earn less than $26,363 a year, and many earn much less, like about $12,000 a year. I am venting. I can’t read these articles without having to make a comment. My blog, http://benL8.blogspot.com