NCPA study analyzes Social Security reform proposals
By Paula Aven Gladych
Most Social Security reform proposals would result in fewer benefits for future retirees, but if the program pays out less in benefits, the payroll taxes needed from younger workers to support the program would be lower than they would be to fully fund benefits under the current program.
A new study by the National Center for Policy Analysis analyzed all of the different proposals to reform Social Security, including progressive price indexing, changing the benefit formula, raising the retirement age and eliminating the maximum taxable wage.
The study found that raising a 41-year-old middle-income man’s retirement age to 70 would reduce his lifetime benefits by about $60,000. But since his taxes would fall by about $40,000, compared to the taxes necessary to fully fund benefits under the current program, the lower tax burden would offset two-thirds of the benefit loss. Raising the retirement age for the 41-year-old earning a poverty-level wage would reduce his lifetime benefits by about $26,000 but his lower tax burden offsets about 40 percent of the benefit loss. For a very high income worker (16 times the poverty level), the lower tax burden would offset 90 percent of the benefit loss.
Changing the benefit formula to make it less generous actually causes the 41-year-old middle-income worker’s taxes to drop by more than the loss of benefits. Under progressive price indexing, his lower taxes exceed his benefit loss by $30,000.
Among 26-year-olds, raising the retirement age would reduce a very high-income worker's taxes by more than the reduction in benefits. For a medium-income earner, the tax reduction would make up for 95 percent of his benefit loss. The fall in taxes for a poverty-level worker would offset about half of his lost benefits.
Progressive price indexing would reduce the tax burden for today’s 26-year-olds in every income group by more than their benefit loss, when compared to a fully funded current program.
Changing the benefit formula would reduce the taxes of the highest-income earner by more than the reduction in his benefits. The benefit loss of a medium-wage worker would be almost entirely offset by tax reductions. The poverty-level worker's benefit loss would be offset 85 percent by lower taxes.
“You can’t just focus on the change in benefits,” said Andrew J. Rettenmaier, co-author of the report, an NCPA senior fellow and executive associate director at the Private Enterprise Research Center at Texas A&M University. “You have to compare the taxes necessary to fully fund any reform.”
Raising the taxable maximum would increase the taxes of very high income workers, but for today’s 26-year-olds half of the tax increase would be offset by increased benefits the government would have to pay to those same workers.
“The biggest problem with raising the maximum taxable wage is that it commits the government to a larger program,” said Rettenmaier. “Instead of increasing taxes on higher income workers, the progressive price indexing reform lowers their benefits and reduces the program’s size. Progressive price indexing produces similar progressivity as does increasing the taxable maximum, but it is more fiscally responsible in the long-run.”
Originally published on BenefitsPro.com