Writing in the Wall Street Journal, the Committee for a Responsible Federal Budget’s Maya MacGuinea argues that raising the Social Security payroll tax ceiling, while perhaps justifiable, won’t fix the problem so much as delay it.
“According to the Social Security Administration (SSA), eliminating the cap would close about 70% of the system’s 75-year imbalance. According to Congressional Budget Office accounting, it would close only 45% of the gap.”
I think eliminating the so-called “tax max” would be a bad idea – for a LOT of reasons. Check out my 2011 AEI paper for the gory details…
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6 comments:
Andrew, I hope that you will comment on the SSA's data here. You are correct that the latest SSA estimate is about 70% of the gap. That isn't terribly different from the year before.
That doesn't seem right given the largest difference between the two runs would be (1) 75 year shortfall was roughly a trillion dollars larger (2) we didn't collect payroll taxes on high wage workers in 2013.
Separately, the life of the Trust Fund has been extended where the primary difference is that we didn't collect higher payroll taxes in 2013.
2012 run :
http://www.ssa.gov/OACT/solvency/provisions/tables/table_run371.html
2012 run :
http://www.ssa.gov/OACT/solvency/provisions/tables/table_run116.html
I am not sure how not collecting payroll taxes will make Social Security more solvent.
Raising the cap on wages to 100% of wages would only increase revenues by 15%. The reason is simple, 85% of all wages are subjected to the OASI and DI tax (10.6% and 1.8% respectively).
Of this 15% increase in revenues, based on the 1977 wage indexing benefit formula, over 55% would have to be set aside each year to pay higher future benefits. Most people do not start out earning the max.
The current projected shortfall in benefits in 2033 is 25%. If the wage cap is eliminated, then OASI revenues would increase by 15% of which 55% must be set aside leaving no more than 7%. When we compare a 25% shortfall in payable benefits to the 7% net increase in revenues, we are still short by 18%.
Are people finally realizing that correcting the failure of a 77 year ponzi scheme is extremely painful?
The 95% of every dollar collected since SS began has been paid out in benefits. This leaves very little to save for future beneficiaries. As the worker to beneficiary ratio drops from 4 to 2.5, it is no different than revenues dropping by 40% or more. Now compound the problem with lower worker participation rates.
In 2016 SS-DI will face a problem. Which way will congress or the people go? Will benefits be cut by 20% and continue being cut as revenues per beneficiary drop or will workers accept higher payroll taxes?
Joe, I don't really know the answer to your question -- one factor might be the additional year of extra revenues, but given that this extra year is STILL in deficit I'm not sure. It could be that the extra year of a smaller deficit might make a difference, but I'm just not too sure. You'd probably have to do some more digging -- say, calculate PVs of the annual deficit/surplus for each year, compare year by year and see how things play out.
The chart is somewhat misleading as it leaves out taxation of benefits and interest income. A reasonable person would assume that zero on the y-axis is the tipping point, but it is not.
When creating a pension, one ideally would separate the pensions by cohort or by individual to be more accurate. Social Security was setup to be more of a pension for workers who had no pension. The word "Insurance" was added to the social security act was to pass muster with the courts. A pension insinuated some type of payment where as insurance was to cover a loss with a lower bar to pass.
Adding interest to the net revenues of Social Security may make the program look better for a slightly longer period of time, but it masks and down plays the severity of the problem. Those who like thinking social security as a pay-as-you-go program love this; it makes the program look better.
I on the other hand prefer using the actuary approach. This approach treats all those covered both beneficiaries and workers on a more even level. It also more accurately portrays the problems. Applying all the interest towards current benefits simply starves and takes from current workers/future beneficiaries. To me this is simply theft.
Looking at the 5 decades of newspaper articles I have on social security they all have a common denominator; they discount future beneficiary’s contributions to zero in order to make the changes more palatable. However, these changes have always been too little thus requiring ever larger painful changes in the future.
At some point in time the changes will be so severe, that the system will simply implode. What happens then? Is it better to keep the program going to save 44 million than saving 200 million in the future? I made a similar statement in 1982-3. Is it better to keep the program going to save 20 million than 160 million in the future.
During my modeling of social security I ran into a annomoly in my program. When I assumed an higher wage growth, SS-OASI ability to pay benefits increased slightly, but the payable scheduled benefits decreased. the reason was simple: wage indexing created a divergent series. Increased wage growth required higher payroll taxes to pay higher future benefits. Lower wage growth required lower payroll taxes.
This is actually no different than what happened in 1950 with the increase in the base from $3,000 to $4,500 and adding those categories of workers not covered by SS-OASI in 1937. They saw a boost in revenues, but after a few years saw increases in costs.
Below are changes in cost, revenue, OASI tax and OASI base. I would expect any increase in the base to have a similar affect.
YEAR COST REVENUE TAX
1938, 900%, -51%, 0%, 0%
1939, 40%, 62%, 0%, 0%
1940, 343%, -39%, 0%, 0%
1941, 84%, 130%, 0%, 0%
1942, 39%, 28%, 0%, 0%
1943, 23%, 22%, 0%, 0%
1944, 22%, 7%, 0%, 0%
1945, 28%, 0%, 0%, 0%
1946, 38%, 2%, 0%, 0%
1947, 22%, 19%, 0%, 0%
1948, 19%, 14%, 0%, 0%
1949, 19%, -8%, 0%, 0%
1950, 42%, 61%, 50%, 0%
1951, 92%, 29%, 0%, 20%
1952, 16%, 11%, 0%, 0%
1953, 36%, 4%, 0%, 0%
1954, 21%, 29%, 33%, 0%
1955, 36%, 10%, 0%, 17%
1956, 15%, 9%, 0%, 0%
1957, 29%, 10%, 0%, 0%
1958, 15%, 10%, 0%, 0%
1959, 19%, 6%, 13%, 14%
1960, 9%, 33%, 22%, 0%
1961, 11%, 4%, 0%, 0%
1962, 12%, 6%, 5%, 0%
1963, 7%, 20%, 17%, 0%
1964, 5%, 8%, 0%, 0%
1965, 12%, 2%, 0%, 0%
1966, 8%, 28%, 4%, 38%
1967, 7%, 13%, 1%, 0%
1968, 16%, 4%, -6%, 18%
1969, 7%, 18%, 12%, 0%
1970, 19%, 9%, -2%, 0%
1971, 16%, 11%, 11%, 0%
1972, 12%, 12%, 0%, 15%
1973, 22%, 21%, 6%, 20%
1974, 13%, 13%, 2%, 22%
1975, 13%, 9%, 0%, 7%
1976, 12%, 11%, 0%, 9%
1977, 11%, 9%, 0%, 8%
1978, 10%, 8%, -2%, 7%
1979, 12%, 16%, 1%, 29%
1980, 16%, 17%, 4%, 13%
1981, 18%, 18%, 4%, 15%
1982, 12%, 0%, -3%, 9%
1983, 8%, 20%, 4%, 10%
1984, 6%, 12%, 9%, 6%
1985, 6%, 9%, 0%, 5%
1986, 6%, 7%, 0%, 6%
1987, 4%, 7%, 0%, 4%
1988, 7%, 14%, 6%, 3%
1989, 6%, 10%, 0%, 7%
1990, 7%, 8%, 1%, 7%
1991, 8%, 4%, 0%, 4%
1992, 6%, 4%, 0%, 4%
1993, 5%, 4%, 0%, 4%
1994, 4%, 2%, -6%, 5%
1995, 5%, 4%, 0%, 1%
1996, 4%, 6%, 0%, 2%
1997, 4%, 9%, 2%, 4%
1998, 3%, 7%, 0%, 5%
1999, 2%, 8%, 0%, 6%
2000, 5%, 7%, -1%, 5%
2001, 5%, 6%, 0%, 6%
2002, 4%, 4%, 0%, 6%
2003, 3%, 1%, 0%, 2%
2004, 4%, 4%, 0%, 1%
2005, 5%, 7%, 0%, 2%
2006, 4%, 6%, 0%, 5%
2007, 8%, 5%, 0%, 4%
2008, 4%, 3%, 0%, 5%
2009, 9%, 0%, 0%, 5%
2010, 4%, -3%, 0%, 0%
2011, 3%, 3%, 0%, 0%
2012, 7%, 5%, 0%, 3%
2013, 5%, 2%, 0%, 3%
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