Monday, September 11, 2017

Smith: “How Would Dismantling Obamacare Impact Social Security?”

Writing at, Brenton Smith looks at how repealing the Affordable Care Act might impact Social Security:

Why? The ACA added about $1 trillion of projected revenue to the program in 2010 (see the comments for details). At the time, economists believed that this legislation would cause paychecks to rise as healthcare costs are reduced. This sequence is great for Social Security because compensation will shift from healthcare premiums that are exempt from payroll taxes to wages that are taxable.

I am not saying that the ACA was smart legislation, nor that laws by themselves will control the cost of healthcare. The point here is that the Trustees assume that it would push the cost of health insurance down and consequently the paychecks of workers higher.

I agree with the theory. I’ve argued in the past that rising employer health costs have eaten away at employee wages, especially for low and middle earners, thereby reducing the wages taxed by Social Security. If we can reduce employer health costs, that should increase wages and tax revenues.

Obviously, whether the ACT actually will reduce health costs, and by how much, isn’t really known. But if Congress repealed the ACA, you could expect the Social Security Trustees to project a somewhat larger long-term deficit. 

1 comment:

WilliamLarsen said...

The initial SS-OASI benefit is calculated using the SSA wage index. This index is based on the change in SSA wages. It indexes the bend points that determine when the 90%, 32% and 15% brackets take affect.

As wage growth increases, so does the initial SS-OASI benefit. So subjecting the now exempt healthcare insurance value to SS wages would increase the SSA wage base. This in affects increases the initial SS-OASI benefit.

As I wrote the Commission on Social Security in 2001 that Economic growth (wag growth) was bad for social security, the same holds true for this as well.

For example: Let us say wage growth and inflation were both 2% and the US Treasury were 4.5%. Based on this the SS payroll tax would have 7.97% to fund these benefits on an actuarial basis. Now let us say the healthcare benefit were worth $8K. This would increase the SSA wage base in that year by about 17%. Since healthcare costs continue to rise faster than inflation, it would be a good assumption that adding healthcare to SS wages would also increase a bit faster. Let us say it is closer to adding 1%. So instead of a 2% wage growth it is now 3%. SS gets more revenue and everyone is happy.

However, the tax rate now needed to fund this higher initial benefit now rises to 10.38%. But 1% healthcare rises I think are a bit low. So at 2% additional wage growth the tax needed to fund these initial benefits is now 13.24%.

The problem is that this in an actuarial analysis and SSA is not funded on a fully funded program, but a cash flow basis. So the time value of money does not work. So the tax rate would have to be much higher than the actuarial tax rate projected over even 75 years.

Yes there would be a short two year window before the first cohort was able to begin drawing benefits.

If you think I am all wet on this, then read the commission's report on Social Security. page 16.

Also take a look at page 13.

Both of these are nearly identical in wording to what I sent.

Andrew to you remember when you called me back in 1998/1999 to discuss my paper on "Why Economic Growth Was Bad For Social Security?" The higher the wage growth, the higher the payroll tax must be to fund future benefits.