The Congressional Budget Office (CBO) analyzed several different payroll tax proposals to shore up Social Security’s finances, and the results are not very appealing.
The Social Security trust fund ran a $71 billion deficit in 2013 that is on pace to quadruple by 2032. Some have called for a payroll tax increase, but CBO found that in order to balance the trust fund over 75 years, the payroll tax would have to be permanently increased from 12.4 percent to 15.9 percent—a nearly one-third increase—as soon as 2015. It’s hard to see how this would benefit most Americans in the long run, however:
- Middle and low-income earners. This substantial tax increase would harm those whom Social Security is intended to benefit the most. Under the 15.9 percent rate, someone earning $50,000 would pay an additional $1,800 per year in payroll taxes (half paid by his or her employer, unless the person is self-employed). This increase would put significant strain on middle- and lower-income earners and would exacerbate the payroll tax’s disincentives to work.
- Young Americans. The tax would also fall disproportionately on the young. While lifetime payroll taxes would increase by 6 percent to 9 percent for those born in the 1960s, the new rate would amount to a 27 percent lifetime increase in payroll taxes for Americans born after 2000.
- Savers. The tax increase would take more money away from those trying to build their own savings for retirement.
All of this pain would be just to sustain current benefits—that extra $1,800 per year out of Americans’ paychecks would not increase the amount workers would receive when they retire. In essence, this proposal asks younger, poorer Americans to pay more so that Social Security can continue to subsidize decades of inflated retirement benefits, including for the richest Americans who do not need them.
So why not just eliminate the cap on income subject to the payroll tax (currently $117,000)?
This “fix” poses similarly prohibitive tax increases that would especially harm the self-employed and certain small businesses. If the cap were eliminated in 2014, someone earning $150,000 would experience a 26 percent payroll tax increase, amounting to an extra $1,900 on his or her tax bill. Someone earning $250,000 (not an extravagant sum for families in major metropolitan areas) would pay $8,100 more in payroll taxes—more than doubling their current payroll tax burden.
Keep in mind that this tax hike would come on top of income taxes, which already disproportionately tax high-income earners.
There are better optionsavailable than drastically increasing payroll taxes. Lawmakers could extend payroll-based private retirement accounts to many more Americans through proposals such as the auto-IRA. Indeed, fully 73 percent of millennials support private retirement accounts for Social Security.
Coupled with other reforms, such as scaling back benefits for the wealthiest beneficiaries and adjusting the retirement age to reflect improvements in life expectancy, a better approach would ensure the solvency of Social Security for those who truly need it while giving Americans of all incomes more control over their own retirement savings.