Why No One Is Even Talking about Raising Payroll Taxes to Fund Social Security
Every dollar that goes into Social Security is a dollar that can’t go into something that would serve them.
Brenton Smith November 23, 2018
Are you getting your money’s worth from Social Security? This isn’t idle curiosity. It will define the future of the program.
Last month, the Urban Institute released its updated projections on the lifetime benefits and costs of Social Security and Medicare (see Social Security and Medicare Lifetime Benefits and Taxes). While the authors conclude that Social Security offers a better deal than annuities available in the private sector, the numbers suggest a different outcome to me: a typical worker loses money on the program.
Less Value Than Meets the Eye
You have to understand that the reported numbers somewhat overstate the reality of the program’s economic value, and those results get progressively worse over time.
- First, the numbers exclude people who die before they are eligible. So the analysis excludes the population of the largest money losers from the analysis.
- Second, the reported figures do not include the impact of the taxation of benefits.
- Finally, the numbers assume that the financial imbalances in Social Security will be fixed without more tax revenue or less favorable benefits. Social Security will fix itself.
Economics vs. Demographics
Losing money on average with Social Security is a massive economic obstacle for those looking for reform. If people on balance were making money, Social Security financing gaps would disappear, as lawmakers could increase the cost or reduce benefits such that voters would simply make less money. That was the case back in 1983, and politicians reached a popular reform to postpone imminent insolvency.
Now we face a much different situation, one in which average workers face the prospect of losing money. This prospect is a serious problem for Social Security for two reasons: Financially, the strategy of losing money isn’t a sound way to prepare for retirement. Politically, it means there is less room to find political agreement on tax increases. At this point, it is entirely possible that we have reached a peak-revenue scenario.
Typically, doomsayers argue with great trepidation that originally Social Security enjoyed 142 workers for every retiree. Now, we have just 2.8 to support those collecting benefits.
While people tend to blame Social Security’s woes on changing demographics and the number of retirees, the larger problem is that the tax rate hasn’t moved in more than 30 years. Typically, doomsayers argue with great trepidation that originally Social Security enjoyed 142 workers for every retiree. Now (oh my), we have just 2.8 to support those collecting benefits.
How did we fall from 142/1 down to 3/1 without much problem? The reason is that payroll taxes rose nearly 5 percent per year between 1950 and 1990. Since that time, the levy on wages hasn’t budged. My guess is that we have hit peak-tax rates in no small part because workers realize they are losing money on the program.
It Would Already Be Done
In contrast, some writers suggest that a large majority of the public supports raising payroll taxes.
My doubts linger. I believe that if that were the case, Congress would have already secured a popular program with what supporters claim is a popular solution.
Higher Taxes Aren’t Popular
The nation is not even talking about the possibility of higher tax rates. In the 2018 midterms, the issue was virtually invisible on the heels of a less than favorable update. Even in battleground states with significant senior populations, no candidate was proposing an increase in the payroll tax rate to stabilize the program’s health.
In 1983, that unpopular concept was possible because most Americans enjoyed great returns on the program. At the time, Social Security was fairly generous. Overall, the average-income single retiree retiring in 1985 received about $266,000 of benefits compared to contributions of $166,000. Even if you had to work for 20 years with higher taxes, the program had room for workers to pay more and still make money.
This audience is a very tough sell on higher tax rates because they realize that every dollar that goes into Social Security is a dollar that can’t go into something that would serve them.
Today, writers continue to tell younger workers that the program is a good deal for them. The problem is that 80percent of younger workers do not believe the terms will remain the same. There are even some who think they will get nothing. This audience is a very tough sell on higher tax rates because they realize that every dollar that goes into Social Security is a dollar that can’t go into something that would serve them.
I will be writing separately on the meaning of this report for the prospect of eliminating the cap. In the meantime, understand that the revenue cavalry is not on the way. It is probably not even coming at all.
Bottom of Form
Brenton Smith is the founder of Fix Social Security Now and writes on the issue of Social Security reform, appearing in national media like Forbes, Marketwatch, FoxBusiness, and FEE.org.