The Democrats’ Social Security Plan Means Much Higher Taxes
Absent other reform it’d raise the total top marginal rate to 59.4% -- the developed world’s highest.
By Andrew G. Biggs
The Wall Street Journal
May 10, 2017
Social Security may be the “third rail” of U.S. politics, but congressional Democrats are suddenly eager to risk touching it. Over a remarkably short time they have embraced an ambitious but flawed policy of expanding the program’s benefits via tax increases on all workers, including doubling payroll taxes on high earners.
Since its release on April 5, Rep. John Larson’s Social Security 2100 Act has accrued 160 co-sponsors, more than any other reform proposal in recent history. With support from 80% of House Democrats, Mr. Larson’s legislation can fairly be called the Democrats’ Social Security plan.
Democrats have always been reluctant to cut Social Security benefits, favoring tax increases to fix the troubled program’s long-term deficit of more than $10 trillion. But today’s Democrats have gone further, embracing an expanded Social Security program to address what they claim is inadequate retirement saving outside the government-run system.
The Social Security 2100 plan would boost the initial benefits Americans receive upon retirement, and pay larger cost-of-living adjustments, or COLAs, in the years after. Over the plan’s first 10 years, Social Security benefit payments would rise by almost $1.2 trillion, according to an analysis by Social Security’s actuaries.
To fund those higher benefits, the plan would increase the Social Security payroll rate from the current 12.4% to 14.8% between 2019 and 2042. The plan also would phase out the ceiling on earnings subject to the tax, currently $127,000, so that by the mid-2030s all earnings would be taxed.
For low- and middle-income workers, lifetime payroll taxes would rise by nearly one-fifth from current levels. For a high earner with an average annual salary of $237,000, payroll taxes would more than double. Absent any other tax reform, the effective top federal marginal tax rate on earned income (inclusive of Medicare taxes and limitations on deductions) would rise from the current 44.6% to 59.4%. State income taxes could boost the total marginal rate as high as 72.7% for California residents. Under the Democrats’ Social Security plan the U.S. would have, by far, the highest top marginal tax rate in the developed world.
Those extra benefits wouldn’t go only to the poor. According to the Social Security Administration’s actuaries, the poorest 4% of retirees—that is, low earners with relatively short careers—would receive an extra $361 a year in initial benefits. Individuals averaging $127,000 a year over their working careers, who make up the richest 6% of retirees, would receive an additional $511 annually.
But the Democrats’ higher COLA payments would exacerbate the imbalance because, increasingly, the rich live longer than the poor. A 2014 Congressional Budget Office study found that the highest-income Americans live 6.2 years longer past 65 than the poor. Incorporating these longevity differences, the Democrats’ plan would boost lifetime benefits for a $127,000 annual earner by more than $20,000. The poorest retirees would only see a $7,300 rise in benefits. A better-targeted plan could couple more poverty reduction with lower taxes.
To its credit, the Democrats’ plan would make a big dent in Social Security’s long-term deficit, fixing all of it under the Social Security Administration’s projections and most of it under CBO’s more pessimistic forecast. But the tax increases included in the Social Security 2100 Act would also significantly reduce revenue in the rest of the federal budget.
Most economists believe—and the SSA and CBO scorekeepers accept—that employers who are required to pay higher Social Security taxes would reduce wages to help cover those costs. Those lost wages would no longer be subject to federal income taxes or Medicare taxes. According to a recent analysis by the Joint Committee on Taxation, lost income and Medicare taxes would offset between 12% and 21% of workers’ Social Security payroll tax increases, depending on income level.
This projected loss of non-Social Security revenue does not account for any behavioral effects from dramatically increasing marginal tax rates. Left-leaning economists Emmanuel Saez and Jeffrey Liebman found in a 2006 study that even modest behavioral reactions could reduce the net revenue gains from a plan like Mr. Larson’s by nearly half. Assume stronger behavioral effects (specifically, an elasticity of taxable income of 0.5), and losses to non-Social Security revenue would, in the authors’ words, “swamp any benefits from the increase in payroll tax revenue.” In other words, the Democrats’ Social Security reform could increase government deficits and debt, permanently.
President Trump’s pledge not to cut Social Security benefits leaves the Republicans’ position on reform unclear. But the Democratic Party’s stand on Social Security couldn’t be clearer: higher taxes on all workers to fund higher benefits to all retirees, including the richest, and the highest marginal tax rates in the developed world, which would significantly cut income tax and Medicare tax revenue. Democrats may find that the third rail of American politics can still deliver a shock.
Social Security may be the “third rail” of U.S. politics, but congressional Democrats are suddenly eager to risk touching it. Over a remarkably short time they have embraced an ambitious but flawed policy of expanding the program’s benefits via tax increases on all workers, including doubling payroll taxes on high earners.
Since its release on April 5, Rep. John Larson’s Social Security 2100 Act has accrued 160 co-sponsors, more than any other reform proposal in recent history. With support from 80% of House Democrats, Mr. Larson’s legislation can fairly be called the Democrats’ Social Security plan.
Democrats have always been reluctant to cut Social Security benefits, favoring tax increases to fix the troubled program’s long-term deficit of more than $10 trillion. But today’s Democrats have gone further, embracing an expanded Social Security program to address what they claim is inadequate retirement saving outside the government-run system.
The Social Security 2100 plan would boost the initial benefits Americans receive upon retirement, and pay larger cost-of-living adjustments, or COLAs, in the years after. Over the plan’s first 10 years, Social Security benefit payments would rise by almost $1.2 trillion, according to an analysis by Social Security’s actuaries.
To fund those higher benefits, the plan would increase the Social Security payroll rate from the current 12.4% to 14.8% between 2019 and 2042. The plan also would phase out the ceiling on earnings subject to the tax, currently $127,000, so that by the mid-2030s all earnings would be taxed.
For low- and middle-income workers, lifetime payroll taxes would rise by nearly one-fifth from current levels. For a high earner with an average annual salary of $237,000, payroll taxes would more than double. Absent any other tax reform, the effective top federal marginal tax rate on earned income (inclusive of Medicare taxes and limitations on deductions) would rise from the current 44.6% to 59.4%. State income taxes could boost the total marginal rate as high as 72.7% for California residents. Under the Democrats’ Social Security plan the U.S. would have, by far, the highest top marginal tax rate in the developed world.
Those extra benefits wouldn’t go only to the poor. According to the Social Security Administration’s actuaries, the poorest 4% of retirees—that is, low earners with relatively short careers—would receive an extra $361 a year in initial benefits. Individuals averaging $127,000 a year over their working careers, who make up the richest 6% of retirees, would receive an additional $511 annually.
But the Democrats’ higher COLA payments would exacerbate the imbalance because, increasingly, the rich live longer than the poor. A 2014 Congressional Budget Office study found that the highest-income Americans live 6.2 years longer past 65 than the poor. Incorporating these longevity differences, the Democrats’ plan would boost lifetime benefits for a $127,000 annual earner by more than $20,000. The poorest retirees would only see a $7,300 rise in benefits. A better-targeted plan could couple more poverty reduction with lower taxes.
To its credit, the Democrats’ plan would make a big dent in Social Security’s long-term deficit, fixing all of it under the Social Security Administration’s projections and most of it under CBO’s more pessimistic forecast. But the tax increases included in the Social Security 2100 Act would also significantly reduce revenue in the rest of the federal budget.
Most economists believe—and the SSA and CBO scorekeepers accept—that employers who are required to pay higher Social Security taxes would reduce wages to help cover those costs. Those lost wages would no longer be subject to federal income taxes or Medicare taxes. According to a recent analysis by the Joint Committee on Taxation, lost income and Medicare taxes would offset between 12% and 21% of workers’ Social Security payroll tax increases, depending on income level.
This projected loss of non-Social Security revenue does not account for any behavioral effects from dramatically increasing marginal tax rates. Left-leaning economists Emmanuel Saez and Jeffrey Liebman found in a 2006 study that even modest behavioral reactions could reduce the net revenue gains from a plan like Mr. Larson’s by nearly half. Assume stronger behavioral effects (specifically, an elasticity of taxable income of 0.5), and losses to non-Social Security revenue would, in the authors’ words, “swamp any benefits from the increase in payroll tax revenue.” In other words, the Democrats’ Social Security reform could increase government deficits and debt, permanently.
President Trump’s pledge not to cut Social Security benefits leaves the Republicans’ position on reform unclear. But the Democratic Party’s stand on Social Security couldn’t be clearer: higher taxes on all workers to fund higher benefits to all retirees, including the richest, and the highest marginal tax rates in the developed world, which would significantly cut income tax and Medicare tax revenue. Democrats may find that the third rail of American politics can still deliver a shock.
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