Marc Goldwein: These 5 Supposed Fixes for Social Security Won’t Solve Its Problems
Marc Goldwein is the senior vice president and senior policy director of the Committee for a Responsible Federal Budget. He recently wrote an op-ed that appeared in MarketWatch. It is reposted here.
A recent interactive poll released by Voice of the People finds that when presented with trade-offs, the American public is willing to make the tough tax and spending choices to secure Social Security.
Yet with the program hurtling toward insolvency and a 21% across-the-board benefit cut looming around when today’s 50-year-olds retire, many of our leaders are putting their head in the sand and pretending no such trade-offs need to be made.
In the final presidential debate, when asked about how to save Social Security, neither Donald Trump nor Hillary Clinton presented a credible plan to do so.
Sadly, there are no quick fixes that will save Social Security. Here are some popular ideas that sound good but just won’t do the job:
Eliminate Social Security fraud
No one doubts that some beneficiaries cheat the system, and policy makers should do whatever they can to prevent this. But the numbers are small. Total improper payments in Social Security last year totaled $5 billion, while it would take $150 billion a year to make the program solvent. That means that even if we could eliminate fraud — and we can’t — it would only solve 3% of the solvency gap.
Tax investment income
One proposed option to improve Social Security’s finances would be to apply (some or all of) the 12.4% payroll tax to capital gains, dividends, and other investment income. But as the capital-gains rate goes up, stock sales fall — meaning less revenue from our existing taxes. In fact, according to official scorekeepers, when the rate exceeds 30% or so (it’s about 25% now), the government actually starts losing tax revenue.
Applying the payroll tax to capital gains would therefore be little more than a shell game, raising revenue for Social Security but shrinking the revenue base for the rest of government. A broader investment tax could raise some funds, but not nearly as much as advertised.
Grow the economy
Faster economic growth would be great for Social Security — and for the country as a whole. But making Social Security solvent with economic growth alone would require doubling projected long-term economic growth to levels of productivity growth never seen for even a decade, let alone three-quarters of a century, in modern history.
Economic growth can’t fix the program’s structural imbalances, since benefits themselves are indexed to wage growth. Higher growth means more payroll taxes today, but more spending tomorrow. According to the Urban Institute, even a 75% increase in growth rates would only close a third of the program’s structural gap.
Make the rich pay the same as everyone else
Unlike the other quick fixes I’ve described above, increasing the maximum amount of income subject to the payroll tax (currently $118,500) truly can improve the finances of Social Security. But it’s no silver bullet.
For one, subjecting all income to the Social Security tax is far from an easy fix. Doing so, according to Congressional Budget Office estimates, would represent the largest tax increase the country has passed since 1968, and it would mean a top tax rate of over 50% with all the additional funds going to Social Security instead of other priorities (the same amount of revenue could almost fund Hillary Clinton’s entire agenda).
And while a higher taxable maximum would substantially improve program solvency, it would be much less successful at closing Social Security’s structural imbalance. Based on estimates from the Social Security actuary, eliminating the taxable max would close two-thirds of Social Security’s solvency gap, but just over one-third of its structural gap by the 75th year of the projection window. This means much more will need to be done to make Social Security sustainably solvent.
The most popular and easiest fix to Social Security is to ignore the problem altogether. But this is the worst solution of all. In 2034, the trust fund will run out of reserves, and every single recipient would see their benefits cut by 21%. That’s a $100,000 cut in lifetime benefits for a typical 50-year old (you can see how much you’d lose here) and a deep enough cut to double the number of seniors in poverty.
Almost any option would be better than doing nothing. For example, under the proposed Simpson-Bowles plan, 87% of beneficiaries are better off in 2050 than if we do nothing. That plan would raise the amount of income subject to the payroll tax, slow benefit growth for higher earners, index the retirement age to life expectancy, measure inflation more accurately and enhance benefits for low earners.
Many other plans exist that would achieve solvency with different choices. And an interactive tool, The Reformer, allows anyone to design their own plan.
There are many options to fix Social Security. But any plan to secure the program and strengthen retirement security will involve facing trade-offs and making hard choices.
There are no quick fixes. But if we act soon, it will be a whole lot easier to fix Social Security than if we wait.
"My Views" are works published by members or staff of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.