Source: NCPA
DALLAS – Most Social Security reform proposals would result in fewer benefits for future retirees. However, if the program pays out less in benefits there is an offsetting gain: payroll taxes needed from younger workers to support the program will be lower than they would be to fully fund benefits under the current program. In some cases workers would actually come out ahead, with the tax reductions exceeding benefit cuts. These are the conclusions of a new study from the National Center for Policy Analysis (NCPA).
“Most public attention has focused entirely on benefits cuts,” said NCPA Senior Fellow Pamela Villarreal. “However, lower tax rates offset much of the loss of benefits, and in some cases more than offset them.”
As the congressional “Super Committee” attempts to cut $1.5 trillion from the federal budget, the NCPA study analyzes four of the most commonly discussed Social Security reforms:
- Progressive price indexing: a way of making benefits grow less rapidly for higher-income workers.
- Changing the benefit formula: a way of reducing the size of the monthly benefit checks.
- Raising the retirement age: increasing it to age 70 by 2032 followed by increases of one month every two years.
- Eliminating the maximum taxable wage: applying the payroll tax to all wage income and crediting all earnings in calculating benefits.
|
Change in Lifetime Taxes and Benefits for Average Income Single Male, age 41 (in 2011 dollars) |
|||
|
Reform |
Lifetime Taxes |
Lifetime Benefits |
Gain/Loss |
|
Progressive Price Indexing |
-$50,793 |
-$20,522 |
$30,271 |
|
Change the Benefit Formula |
-$63,709 |
-$59,123 |
$4,586 |
|
Raise the Retirement Age |
-$38,687 |
-$59,047 |
-$20,360 |
|
Eliminate the Taxable Maximum |
-$37,458 |
$0 |
$37,458 |
|
|
|||
|
Reform |
Lifetime Taxes |
Lifetime Benefits |
Gain/Loss |
|
Progressive Price Indexing |
-$106,288 |
-$52,406 |
$53,882 |
|
Change the benefit formula |
-$133,316 |
-$135,260 |
-$1,944 |
|
Raise the Retirement Age |
-$80,957 |
-$85,284 |
-$4,327 |
|
Eliminate the Taxable Maximum |
-$78,384 |
$0 |
$78,384 |
Note: Changes in lifetime benefits are in comparison to scheduled benefits and changes in lifetime taxes are in comparison to the taxes necessary to fund scheduled benefits indefinitely.
The average lifetime single male income level is calculated in 2011 dollars at $42,886 for the 41-year old and $51,560 for the 26-year old.
The study found that raising a 41-year old middle-income man’s retirement age to 70 would reduce his lifetime benefits by about $60,000. But since his taxes would fall by about $40,000, compared to the taxes necessary to fully fund benefits under the current program, the lower tax burden would offset two-thirds of the benefit loss. Raising the retirement age for the 41-year old earning a poverty-level wage would reduce his lifetime benefits by about $26,000 but his lower tax burden offsets about 40 percent of the benefit loss. For a very high income worker (16 times the poverty level), the lower tax burden would offset 90 percent of the benefit loss.
Changing the benefit formula to make it less generous actually causes the 41-year-old middle-income worker’s taxes to drop by more than the loss of benefits. Under progressive price indexing, his lower taxes exceed his benefit loss by $30,000.
Among 26-year olds, raising the retirement age would reduce a very high-income worker’s taxes by more than the reduction in benefits. For a medium-income earner, the tax reduction would make up for 95 percent of his benefit loss. The fall in taxes for a poverty-level worker would offset about half of his lost benefits.
Progressive price indexing would reduce the tax burden for today’s 26-year olds in every income group by more than their benefit loss, when compared to a fully funded current program.
Changing the benefit formula would reduce the taxes of the highest-income earner by more than the reduction in his benefits. The benefit loss of a medium-wage worker would be almost entirely offset by tax reductions. The poverty-level worker’s benefit loss would be offset 85 percent by lower taxes.
“You can’t just focus on the change in benefits,” said co-author Andrew J. Rettenmaier, an NCPA Senior Fellow and executive Associate Director at the Private Enterprise Research Center at Texas A&M University. “You have to compare the taxes necessary to fully fund any reform.”
Raising the taxable maximum would increase the taxes of very high income workers, but for today’s 26-year olds half of the tax increase would be offset by increased benefits the government would have to pay to those same workers.
“The biggest problem with raising the maximum taxable wage is that it commits the government to a larger program,” said Rettenmaier. “Instead of increasing taxes on higher income workers, the progressive price indexing reform lowers their benefits and reduces the program’s size. Progressive price indexing produces similar progressivity as does increasing the taxable maximum, but it is more fiscally responsible in the long-run.”
Full study: http://www.ncpathinktank.org/pdfs/st337.pdf
The study is co-authored by NCPA Senior Fellow and executive Associate Director at the Private Enterprise Research Center (PERC) at Texas A&M University Andrew J. Rettenmaier, and PERC Research Scientist Liqun Liu.
The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983.We bring together the best and brightest minds to tackle the country’s most difficult public policy problems — in health care, taxes, retirement, small business, and the environment. Visit our website today for more information.