Wednesday, May 12, 2010

New SSA actuaries memo on Social Security surtaxes

You may recall that during the Presidential campaign then-Sen. Obama's main – actually, only – proposal to fix Social Security was to impose a surtax on high earners. He proposed a tax of 2 to 4 percent on earnings above $250,000, which would not generate additional benefits for individuals paying it. I wrote about the surtax in the Wall Street Journal (available here).

Now SSA's Office of the Chief Actuary, at the request of Republican Reps. Sam Johnson, Kevin Brady and Paul Ryan, has released an analysis of a large number of iterations on that theme. From the memo:

The provisions you requested, with subsequent modifications, would apply a total tax rate of 2, 3, or 4 percent for OASDI covered earnings of individuals that exceed annual earnings thresholds set at $200,000, $300,000, or $400,000 for 2017. For each provision, the threshold would be indexed after 2017 using the national average wage indexing series (AWI) in the same manner used to index the current contribution and benefit base (which is projected to be $140,400 for 2017 under the intermediate assumptions of the 2009 Trustees Report). For each provision, one half of the indicated tax rate would be payable by the employee and the other half by the employer.

The memo also explores variations in which additional benefit are or are not paid upon these contributions.

I think the closest variant to President Obama's proposal evaluation by the actuaries would be a 4 percent tax on earnings above $300,000 (it's not exact, as the Obama campaign wasn't clear whether it's specification of $250,000 was the nominal dollar figure over which it would apply taxes, or whether it was a current figure that would be inflation- or wage-indexed upward to the date of implementation).

In any case, though, this variant would improve the 75-year actuarial balance by around 0.36 percentage points, equal to around 18 percent of the total deficit. This sounds about right, as at the time I found a similar tax on earnings above $250,000 (using the Policy Simulation Group's GEMINI model) would address around 14 percent of the shortfall.

Obviously there are different variations that could be explored, but it seems clear we'll need a fair bit more than this kind of provision to put the program back on track. And there are other reasons I'm not so keen on this idea, outlined in the Wall Street Journal piece. But combined with some benefit reductions at the high end and an increase in the retirement age, you could get pretty close.