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BOHANON & STYRING: The rich will pick up tab for fixing Social Security

April 2, 2016

Economic AnalysisSocial Security is a mess. For nearly a decade, it has paid out more in benefits than it receives in payroll taxes. All that keeps the system solvent, as of now, are the interest payments it receives from the couple of trillion stashed away in government bonds. Those bonds will have to be cashed in soon to keep the system solvent. Those trust fund “assets” will be gone by 2035. Payroll taxes will be able to cover only around 77 percent of scheduled benefits.

When Social Security began in 1937, it imposed a tax of 2 percent on the equivalent of the first $50,000 in income in 2016 dollars. Today, the tax rate is 12.4 percent assessed on the first $118,500 of 2016 income. This massive increase in tax rates and taxable base is a byproduct of changing demographics: There are more retirees per worker today than in 1937. In addition, retirees live longer than they did in 1937. Moreover, benefits from Social Security have increased. Adjusted for inflation, on average recipients receive about twice as much today as they did in 1960.

So what is to be done? The choices are lousy. It’s pretty clear the brunt of Social Security reform will come at the expense of higher-income workers. Social Security will inevitably be changed from an insurance program—where benefits received in retirement bear some relation to contributions made—to a simple welfare program designed to transfer wealth from high earners to low earners in retirement. What’s the least bad way to fleece the rich?

The problem with all “tax the rich” schemes is that they produce incentives for the rich to stop engaging in the behaviors that make them rich. It seems to us less harmful to reduce the future benefits of higher-income earners. If current tax rates are increased on income to fix the Social Security problem, those who pay those taxes will have an incentive to reduce their income-earning effort today. If, instead, their future promised benefits are reduced, the incentive effects today are likely to be more muted.

If Social Security were a private annuity, such a double-cross would land insurance executives in jail. But let’s be honest: Social Security is a welfare program. It is meant to forestall absolute destitution among the elderly. Let’s stop promising more than we can pay!•

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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.
 

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