There’s a debate over whether to save Social Security with higher taxes or lower benefits. Matt Yglesias suggests a mix of the two approaches:
Let’s consider two methods, starting with an all tax approach:
1. Increase the payroll tax by 1%, from 15.3% to 16.3%, and add a $1,000 tax on affluent seniors
Now consider a mix of tax increases and benefit reductions:
2. Increase the payroll tax by 1%, from 15.3% to 16.3%, and cut the Social Security benefits of affluent seniors by $1000.
Do you see the difference? Neither do I.
Yglesias is essentially proposing that the problem be addressed entirely through higher taxes. (That doesn’t mean it’s a bad idea, I’m just trying to clarify the issues involved. And I’d add that Yglesias probably understands this, as he doesn’t claim that it is not an implicit tax increase.)
A useful way to approach government tax and spending issues would be to look at the impact of various proposals on implicit marginal tax rates for both current and future consumption. Payroll taxes and VATs tax current and future consumption at equal rates. Taxes on capital income effectively tax future consumption at a higher rate than current consumption. There may also be different implicit marginal tax rates on low and high levels of consumption (such as “progressivity”). Poor people often pay relatively low taxes in absolute terms, but face high IMTRs due to a rapid phase out of benefits as they begin to work.
PS. There are warnings that Social Security might run out of money in 9 years, leading to automatic cuts in benefits:
A Social Security funding crisis could be on the horizon if policymakers fail to take action to protect the program in the next decade, threatening a 23% cut to all 70 million recipients’ annual benefits, a new report claims.
The analysis by U.S. Budget Watch 2024, a project from the public policy organization Committee for a Responsible Federal Budget, predicts that if the primary trust fund used to bankroll Social Security runs out of reserves by 2033, the average newly retired dual-income couple would see an immediate reduction of $17,400. Single-income couples would lose $13,100.
Even though I am currently on Social Security, I would personally benefit if this were to occur. That’s because the alternative (tax increases and/or steeper benefit cuts for “the rich”, i.e., former thrifty teachers like me), would hurt me more. To be clear, this outcome is very unlikely to occur, as Congress will almost certainly find some sort of less politically toxic fix to the program. BTW, “borrowing money” is not an answer, even if the extra debt is never repaid. That’s because it would require much higher taxes merely to service the additional debt. One way or another, higher taxes are on the way. I had this view even before the GOP switched to being a populist big government party. Now, I’m almost certain.
READER COMMENTS
Lizard Man
Mar 27 2024 at 11:41am
Would it be better to shore up SS by cutting benefits more and raising payroll taxes less? I would assume that raising payroll taxes would reduce both labor supply and labor demand, whereas cutting SS benefits would lower labor demand and increase supply (though if seniors are able to make up some of the lost SS benefits through working, demand might not fall that much).
Craig
Mar 27 2024 at 12:17pm
“Do you see the difference? Neither do I.”
From the government’s cash flow pov, not mucb if any. The only difference is how to treat seniors whose income changes. You either pay a constant and clawback at tax time through IRS OR you pay a lower benefit and adjust as income adjusts through SSA. I’d suggest the IRS route probably administratively easier.
Vivian Darkbloom
Mar 27 2024 at 12:31pm
Or, perhaps a third way, as proposed by Andrew Biggs and Alice Munnell, which involves reducing tax expenditures
Not sure I agree about the long-term math, but the idea is interesting, if only because it is proposed by a serious conservative-leaning and a serious progressive-leaning analyst:
https://crr.bc.edu/the-case-for-using-subsidies-for-retirement-plans-to-fix-social-security-2/
Questions for David Henderson: Does this plan propose increasing taxes or cutting spending? Does it matter what we call it?
johnson85
Mar 27 2024 at 2:07pm
I personally am fine with the 17% cut. This has been on the horizon for years and people have pretty consistently taken the position that trying to address it means you get voted out of office. There is no “fair” solution as the fair solution would involve confiscating the assets of any politician that voted for the “fix” in the early 80’s.
That said, out of politically possible solutions, it seems some obvious first steps that could buy some more time would be (1) escalating benefits by chained CPI-U. (2) Make all of social security taxable, and credit the increase in those taxes to the “trust fund”.
Politically, that’d have to be tied to something that screws younger workers to get passed. Maybe making a “donut” around SS taxes on wages would work? So tax the first ~$168k as is, then maybe make wages subject to SS taxes (or maybe at half the rate) again around $300k? That probably wouldn’t raise much money, but may make the politics better. Or maybe even make it $300k but don’t escalate it, so eventually you go from paying full freight up to the limit and then half freight after the limit?
Scott Sumner
Mar 27 2024 at 3:13pm
Everyone, I don’t have strong views on the various proposals. It doesn’t make much sense to focus on Social Security as a separate program; effectively it’s just part of the federal budget. Thus while you could cut SS benefits, or slow the inflation adjustment, there’s no particular reason to focus on that sort of spending over any other.
My general view is that the best approach is to do things that would make sense even if we did not have a Social Security crisis, such as cutting wasteful spending throughout the federal budget and implementing a carbon tax.
Thomas L Hutcheson
Apr 1 2024 at 10:24pm
But the most wasteful arts are te most popular: ethanol subsidies, farmprice supports, subsidized flood insurnce.
vince
Mar 27 2024 at 3:55pm
Isn’t the choice still big or bigger? When can we get a third party?
R R Schoettker
Mar 27 2024 at 4:22pm
As Mr. Sumner says: “It doesn’t make much sense to focus on Social Security as a separate program; effectively it’s just part of the federal budget.” And I agree. If the US was not profligately trying to rule the world through military hegemony the money spent on those imperial endeavors could probably be employed in propping up the socialistic SS Ponzi scam. Unlike Mr. Sumner, I do have strong views regarding these proposals, I am a proponent of NO taxes and NO benefits. Irrespective of my chronological eligibility; I believe in personal self-sufficiency and not being a perpetual dependent on the State dole; extracted under coercion and the threat of violence from others. I also don’t believe that this corrupting evil can be tweaked, altered or reformed, but only ended. Whether it should be the first such government activity to be terminated is another discussion.
john hare
Mar 27 2024 at 5:35pm
I am eligible for SS. I would walk away from any “benefits” if there were a rational plan implemented to fix the problems. I would like the fix to be NO SS and no taxes supporting it eventually with some form of phase out. I think my “benefits” are as safe as anyone else’s.
Jim Glass
Mar 27 2024 at 11:56pm
Social Security induces the most amazing myopia (when not inducing denial). Some thoughts…
[] Medicare’s unfunded liability is 2.25 times larger than Social Security’s. Nobody talks about that? Medicare also is much harder to fix. Social Security is just cash flow, Medicare is allocation of quality-of-health, and then life-or-death services. As the late great Daniel Patrick Moynihan (who led the reform of Social Security when it went broke last time, in 1983) said when Chairman of the Senate Finance Committee: “Social Security is easy. Medicare is hard. If we can’t fix Social Security, God help us.” That was 30 years ago. Nothing fixed yet since then. OR, to paraphrase Butch & Sundance: “I don’t think we can deal with Social Security.” “Don’t worry about it, Medicare is going to kill us”.
[] “The Social Security Trust Fund running out of money”, will increase the fiscal cost of paying SS benefits by nothing, $0. Thus it will provide no reason to then cut benefits by anything. Let $X be the gap between promised benefits and the amount covered by payroll tax. The day before the Trust Fund runs out the govt will pay full benefits by collecting $X in general revenue (to “pay off” trust fund bonds) and applying it to benefits. The day after the Trust Fund runs out the govt will be able to pay full benefits by collecting $X in general revenue (not bothering to “pay off” any bonds) and applying it to benefits. $X-$X = $0. The idea that the Trust Fund finances SS benefits is the greatest urban legend in American politics. It doesn’t and it was never intended to do so. (FN)
[] The Medicare Trust Fund is on course to be exhausted several years before the SS Trust Fund. How many people are talking about cutting back Medicare benefits? Where’s Yglesias on that?
[] Not a dang thing is new here. Demographics is easy. It’s all been projected for 30 years. (Moynihan left office on 1995.) The Social Security Administration gets input from an Advisory Commission periodically. Normally it is a rubber stamp for the status quo, but the 1994-96 Commission, seeing all this coming, went rogue and published a range of serious reform proposals (from socialist to full privatization) to make SS long-term solvent. It got a lot of publicity. The Republicans who came in with Bush the Lesser briefly took some interest in these. But after being lambasted by the Left for trying to “force grandma to eat cat food” (literally, look it up) they abandoned it. Since then … Zzzzzz…. Where’s everyone been for these 20 years? Does anyone waking up today remember any of those proposals? Nah. That’s how seriously our polity really takes SS’s solvency.
[] Anybody who thinks seniors will happily take benefit cuts, 17% or otherwise, can think again. Congress still well remembers how in 1989 House Ways & Means Chairman Dan Rostenkowski was attacked in his car by an angry mob of seniors (like he was caught in a Latin American revolution) who were furious about a proposed Medicare benefit *increase* for them — adding catastrophic insurance coverage, something Medicare still sorely needs. But it included a premium charge covering part of the cost. Stone him!!!
[] Not to worry, though. SS has already gone bust once and we know how we fixed it then: (1) Benefit cuts for the young; & (2) Payroll tax increase on the young; & (3) Benefits fully protected for retirees and near-retirees (no stonings!) — except for a carefully hidden means test on the richest via making a portion of benefits subject to income tax (that’s only fair) with the tax being sent back to the SSA (instead of to general revenue) creating a net benefit reduction. Expect something like this again — proven best by test.
But don’t sweat the details. Medicare is going to kill us.
johnson85
Mar 28 2024 at 11:03am
The magnitude of the medicare shortfall is much greater, but politicians can’t reform it without people knowing more or less the dollar amount that their benefits are changing by.
Medicare, we could cut provider pay in half tomorrow, and while it would be disruptive to the healthcare community it would be awful for providers and recipients, at the end of the day, medicare recipients would be complaining about not being able to get appointments or care. Turn Medicare into basically medicaid and suddenly lots of care just wouldn’t be provided so Medicare would save on the rates it pays and also possibly see a loss in volume of claims it pays (not sure if the number of patients giving up trying to get care through medicare would outweigh producers trying to figure out a way to ramp up volume on stuff they can make money on).
All that to say, just not spending the money is much easier in medicare than it is in social security, so seniors probably will take some meaningful cut in benefits on Medicare, whereas SS will probably just screw younger workers.
Lizard Man
Mar 29 2024 at 8:28am
For Medicare, there is reason to hope that new medications square up healthspan with lifespan, and thus reduce the actual obligation. Large declines in obesity are very likely coming quite soon (within the next ten years), and that should greatly reduce the incidence of cardiovascular disease, heart attacks, strokes, and probably dementia as well. Which should reduce the most expensive part of Medicare, which is end of life care. Now, if people are living longer, maybe there are more overall incidences of cancer and the increase in costs of cancer care offset any savings from reduced incidences of other diseases and lower costs of care during the final years of life (because people are healthier during those years). But obesity is carcinogenic as well, so that may decline in incidence too.
BC
Mar 28 2024 at 3:22am
“automatic cuts in benefits”
Why is this even called a “cut”? If it’s the benefits that one would get under current law, i.e., the benefits that “automatically” result with no change in law, then isn’t that by definition the baseline benefit level? I realize that people receiving the baseline benefit level in 9 yrs may receive less than those receiving baseline benefit levels now, but it’s always the case that some people receive more or less benefits than others. In every other budget discussion, if spending is scheduled to increase under current law and a new proposed budget increases that spending at a lower rate, then that is called a “cut”. Even though the future spending under the proposal will be higher than current spending, it’s a “cut” relative to baseline future spending under current law. So, why are Social Security benefits different? If no change is made to the law, then no one’s benefits nor taxes will change relative to the current baseline. Calling it a “cut” biases us into increasing spending.
johnson85
Mar 28 2024 at 11:04am
Calling the reduction in benefits to match revenue a “cut” gives some political/rhetorical coverage to politicians trying to make more gradual adjustments than simply letting social security payments drop by a double digit percentage at once.
BC
Mar 28 2024 at 4:01am
“Do you see the difference?”
There might be a difference in terms of the future evolution of Social Security. In the first case, the $1000 tax will “belong” to the Social Security system. In the future, people will ask whether it’s “fair” for affluent seniors to receive such high benefits. After all, people are asking that question now (with all spending not just Social Security). Usually, arguing that an affluent person paid a lot in taxes is not a politically strong argument for that person receiving benefits for the same reason that arguing that a low income person didn’t pay a lot in taxes is not a politically strong argument for cutting that person’s benefits.
In the second case, if one keeps cutting affluent seniors’ benefits all the way to zero, then trying to impose “negative benefits” actually would be politically difficult. It’s politically easier to raise taxes on the affluent above their benefit levels than it is to cut their benefits below zero.
Also, in the second case, if the (young and working) affluent don’t expect to receive much in Social Security benefits, then it will be politically easier to cut everyone’s benefits and taxes. It will be like regular welfare for the poor. In the first case, the young and working affluent will still have the illusion of receiving benefits in the future, so they will be more likely to resist benefit cuts.
That may not be rational, but political issues seem very susceptible to framing (which, of course, is Scott’s point to begin with). In general, taxing people and paying those taxes back to them in the form of benefits (first case, higher gross taxes and benefits) seems to make the program stickier and also easier to embed redistribution within them, which is probably why it’s favored by Yglesias. Cutting benefits and taxes down to the net amount (second case) seems to make the program less sticky because fewer people perceive themselves as benefitting and the redistribution is more transparent. Some people pay and others receive.
Jeff
Mar 28 2024 at 10:45am
Realistically I think both higher taxes and higher benefits are in our future. Ever since the financial crisis and the Covid money barf the farcical nature of our system, in which the government pays job creators $2 (or more) to create $1 worth of jobs, has become increasingly plain. This is why, to Jim’s point, no one is talking about Medicare, because its true purpose is as perhaps the centerpiece of that job creation machine. AI will knock down this house of cards and be especially instrumental in eliminating the type of paper-pushing compliance-oriented jobs that are a staple for those of later middle age. Young people will be kept off the dole/UBI, but I fully expect the SS eligibility age to be reduced to something in the ballpark of 50 in my lifetime. It will be paid for by an asset tax similar to the inflation tax but applied to all assets, which will of course remain plentiful.
Jim Glass
Mar 28 2024 at 3:49pm
For the record. the Treasury’s just-released 2023 Financial Report of U.S. Government states that the actual, meaningful deficit for 2023 was $3.417 trillion, double the mere $1.695 trillion commonly reported. This is using accrual accounting as the US govt requires all significant businesses to use, instead of the cash accounting used by candy stands and the US government itself in computing the $1.695 trillion.
“The $1.7 trillion difference between the budget deficit and net operating cost for FY 2023 is primarily due to accrued costs (incurred but not necessarily paid) that are included in net operating cost, but not the budget deficit. “
Is the press ever going to report this? Yglesias? Hello?? No? It’s interesting to ponder why not. Anyhow…
Here are the differences by line item. Enjoy.
Jose Pablo
Mar 29 2024 at 12:09am
Why using “accrual accounting” only for the “cost” side?
Your imagination (or Congress’ or IRS’ imagination) is the only limit to the “accrued value” of the US Government revenue in 2023. The US government is just very good at keeping secret who the counterparts to its “account receivables” are. But it does have a huge “account receivables”!
And what is the “accrued value” in 2023 of “having the abilitiy to issue the legal tender” until the end of times?
And what is the right way of accounting for future liabilities when you control the nominal rate of discount?
Actually, I find using the cash accounting much more clear. The alternative is highly especulative.
And, in any case, the data is there. The creditors financing the US government sure know. They are the ones that should be worried about the risks. They are not.
robc
Mar 28 2024 at 8:24pm
Why does Matt say raising the retirement age is bad? We should have continued the previous pattern of raising the retirement age by 2 months with each birth year that was used to raise it from 65 to 66 and later 67.
The RMD age was raised recently from 70.5 to 72, so clearly its a reasonable option.
Jose Pablo
Mar 28 2024 at 11:29pm
That’s because it would require much higher taxes merely to service the additional debt.
??
The US government has made “servicing the debt issuing additional debt” the normal course of action. And the US debt market seems to be pretty happy with that.
In 38 years of the last 50 the US government has run a primary deficit, which amounts exactly to servicing the debt with additional debt.
Jose Pablo
Mar 28 2024 at 11:47pm
As presently conceived, social security is just a Ponzi scheme. Of course, you can find ways of fixing a Ponzi scheme (at least for a while): increasing the number of new “investors”, raising “new investors”‘ contributions or diminishing promised returns to early investors. It is easy to see that this is precisely what Yglesias is discussing.
Social Security is (in theory) a mix of two things: a compulsory investment fund for workers and a redistribution scheme.
The rational fixing would consist of privatizing the compulsory investment fund part (I personally find the “compulsory” part paternalistic and humiliating but if you want to keep it …) and financing the “redistribution part” with general taxes like any other of the thousands of redistribution programs already in place.
Just follow the KISS rule …
Scott H.
Mar 29 2024 at 12:38pm
To the extent that social security is a ponzi scheme, the beneficiaries would be the seniors from around 1935 to 1950, and it would be at the expense of a generation sometime in the far future that pays in and ends up receiving nothing.
In other words, as far as you and I are concerned, it isn’t a ponzi scheme.
Jim Glass
Mar 30 2024 at 12:32am
To the extent that social security is a ponzi scheme, the beneficiaries would be the seniors from around 1935 to 1950,
The last time I looked (some years ago) at the SSA’s actuarial data on this, the ‘swing year cohort’ for participants getting back more or less than they paid into SS was those born in 1953, and retiring about now. Those born before got back more than they paid in, the earlier the more. Those born after are getting back increasingly less than they paid in. They, er, we are taking a loss on SS overall to offset the profit received by the “first in” to the program.
Us getting back less than we put in is a simple arithmetic necessity forced by the need to cover the cost of earlier participants getting back more.
at the expense of a generation sometime in the far future that pays in and ends up receiving nothing. In other words, as far as you and I are concerned, it isn’t a ponzi scheme.
Well, I dunno — but three econ Nobel winners have used the word “Ponzi” to describe it. Milton Friedman did many times. But lets look at SS’s friends….
[] Paul Krugman back in 1996 wrote…
… and has been walking that back under fire ever since. But far more enthusiastically…
[] Paul Samuelson wrote in his Newsweek column in 1967…
Ah, those were the days!
So the advocates of SS have stepped through: (1) “Yes, it *is* a Ponzi scheme, and that’s a great thing too!” (1960s); to (2) “Well, kinda, it has some aspects of a Ponzi scheme” (1990s); to (3) “Ponzi scheme? What Ponzi scheme? Who’d ever say such a thing??” (today).
Who’s right? You decide.
Jose Pablo
Mar 30 2024 at 6:00pm
One of many redistribution mechanisms hidden in Social Security is from people dying young to people living longer. SS is, among many other things, a way of “socializing” inheritance.
Always there are more youths than old folks in a growing population.
Maybe. But “growing population” is not fate. That’s one of the problems with central planners.
More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.
This is true. But you don’t need the whole “smoke and mirrors” SS thing to take advantage of that. You get the same with an UBI scheme for the elderly (up to a given % of the total population) financed with a %tax on a growing GDP (ie a VAT). And the % of VAT will be a direct result of the actual growing of the economy and of the political choices made about the percentage of the population covered and about the nominal amount of the handouts.
But then you will lose the mistaken belief that you are financing your own retirement with your contributions. The reality that you are financing handovers for the elderly with (regressive) income taxes will be fully exposed.
But hiding the truth from voters has, no doubt, its political benefits.
Jose Pablo
Mar 30 2024 at 12:32pm
All Ponzi schemes have “beneficiaries” that is not what defines “Ponzi schemes”.
as far as you and I are concerned, it isn’t a ponzi scheme.
I don’t really know. I would have to look at my contribution during my (still ongoing) working life. 30% of my live long salaries. Not a minor amount. Actualize them at the proper “opportunity cost”. Now hypothesize my date of death and the future payments from the Social Security (including the market value of a health insurance for elders). Discount them, again, at the proper rate and compare the two figures.
It could go either way. It depends, mostly, on how long I manage to be around.
Social Security is, simply put, the most confusing and misleading way of taxation you can imagine. Maybe this is one of its “beauties”, that nobody is able to figure out how this “mix and match” of different benefits really works for him in particular.
It is about time to end it and get a much clearer system in place that renders explicit the different benefits and allows for a meaningful political debate about them.
* An UBI for people above a certain age (financed with general taxes). You can pay 15% of the population (people above 65 now represents 18% of the US population) $3,000 a month with a 7% VAT (or any other combination of % of the total population to cover, monthly amount and % of VAT of your choice). Btw, these are the parameters that should be under discussion. That would be a meaningful discussion.
* A state sponsored medical insurance for people above certain age (financed with general taxes)
* A mandatory contribution to an investment fund. It is not clear to me why we need this “part”. If you want people to invest more, stop taxing investment. Don’t tax what you want more of.
Warren Platts
Apr 1 2024 at 7:53pm
How about a 10 or 20 percent tariff on all imports?
BS
Apr 1 2024 at 8:25pm
Look at the bright side: when the Social Security IOUs run out, the federal deficit should decrease slightly. (I assume the government is borrowing right now to fund the shortfall of contributions + “interest” – benefits, and that the borrowing will cease after the last IOU is paid out.)
Thomas Hutcheson
Apr 1 2024 at 10:29pm
parts 🙂
But if we are going to raise taxes, let’s at least make it a lower dead weight loss tax like a VAT!
Jim Glass
Apr 2 2024 at 2:51pm
Don’t count on a VAT. The economic and political space for that in the USA is already largely occupied by state and local sales taxes.
For a ‘benign’ new national tax expect a carbon tax first. It’s better on the merits anyhow.
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