Tax Increases Are the Wrong Way of Dealing with the Social Security Mess

By Dan Mitchell.

"I periodically share data showing that America’s long-run fiscal problem is that the burden of federal spending is growing too quickly.

The same thing is true when looking at specific programs. Here’s a chart showing that Social Security outlays are growing rapidly (which helps to explain why the program has a gigantic long-run fiscal problem).

The chart comes from a Washington Post editorial about the program’s shaky finances.

Here are some excerpts, starting with a description of the problem.

The burden of the payroll tax is already enormous. Though the 12.4 percent rate is technically divided in half between employer and employee, workers end up paying the employer’s side of the tax through lower compensation. …Last year, the Social Security payroll tax raised $1.28 trillion. That’s almost three times what the corporate tax raised. Only the individual income tax raises more federal revenue. …it’s easy to see why the program is broke. The payroll tax rate has been the same since 1990, and revenue as a share of the economy has been roughly flat. The program used to run annual cash-flow surpluses but since 2010 has run deficits — because benefits are rising too quickly.

The editorial then explains why higher payroll taxes are the wrong approach.

According to the latest Congressional Budget Office estimates, the payroll tax rate would need to increase by 40 percent — from 12.4 percent to 17.3 percent — to fund Social Security for the next 75 years. For the median worker in 2025, that would be a tax increase of roughly $3,000. …would the median worker today rather pay $3,000 more in payroll taxes or invest $3,000 in index funds? And why should the government decide that the extra $3,000 is best used for retirement in the first place? Perhaps removing the cap on taxable wages, $184,500 this year, is more appealing since it would affect only high earners. The problem is that doing so would make the top rate on labor income one of the world’s highest while covering only about half of the projected funding gap for Social Security…the payroll tax rate has been raised 20 times already. A 21st hike isn’t going to do the trick.

By the way, that $3,000 tax hike is every year, not a lifetime amount.

And only about 10 percent of Americans would be willing to pay that much to bail out the program.

Here’s another chart from the Post‘s editorial. It shows the amount of taxes needed each year from various income groups to finance existing Social Security promises.

Proponents of bigger government will look at these numbers and argue that higher payroll taxes can solve Social Security’s financing problem.

And if you ignore the potentially damaging impact of higher taxes and more spending, they’re right. At least in terms of math.

But they are overlooking the fact that Social Security has another big problem, which is that it is a lousy way of providing retirement income. Workers pay too much and get too little.

As many countries (including Iceland, Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden. have demonstrated, personal accounts based on private savings are much better. More retirement income, more national savings, stronger economic performance, and smaller government.

P.S. Here’s a primer on the five options for dealing with the Social Security mess."