Keeping Social Security from going broke requires tax hikes that will hit younger Americans for 6 figures
Analysis shows younger workers could face high tax burden over course of careers if payroll taxes rise to save Social Security
Social Security trust funds are only eight years from insolvency: Report
U.S. Social Security Administration Commissioner Frank Bisignano explains why Social Security funds may run out sooner than anticipated on Mornings with Maria.
Social Security marks its 90th anniversary on Thursday, and the longstanding safety program is facing projections of insolvency in less than a decade, while a new report shows the cost of stabilizing the program could cost young taxpayers over the course of their careers.
Social Security's two main trust funds are projected to reach insolvency on a combined basis in the first quarter of 2034. That's in part because the ratio of workers to retirees has declined over time from 16.5 workers per retiree in 1950, to 3.3 workers in 1985 and about 2.8 workers in 2013, per Social Security Administration (SSA) data.
Once the trust funds are tapped out, the program would face an automatic benefit cut by law to match incoming payroll tax receipts unless Congress reforms the program. Insolvency would leave beneficiaries facing an estimated 24% benefit cut on average, according to an analysis by the nonpartisan Committee for a Responsible Federal Budget.
Social Security's trustees estimated that Congress would need to immediately raise payroll taxes by 3.65 percentage points, an increase from 12.4% to 16.05%, on a permanent basis to close the program's 75-year funding shortfall. An analysis by Cato Institute Director of Budget and Entitlement Policy Romina Boccia found that such a tax increase would carry a high cost for young workers.
TAX CHANGES WILL MAKE SOCIAL SECURITY GO INSOLVENT SOONER THAN PREVIOUS ESTIMATE
Social Security faces an insolvency crisis in less than a decade, just shy of its 100th anniversary. (Illustration by Kevin Dietsch/Getty Images / Getty Images)
The Cato analysis found that for a hypothetical median worker entering the workforce at age 22 in 2025, the tax increase would reduce their lifetime earnings by over $110,000 in present value terms over a 45-year working career – roughly equivalent to giving up 20 months of pay at their average monthly wage.
Boccia said in an interview with FOX Business that this hypothetical worker is symbolic of an average worker making a little less than $70,000 a year.
"They already face quite a high burden from the payroll tax – on an annual basis, they currently pay more than $8,000 a year on their less than $70,000 income just for Social Security," she said. "If we had to raise payroll taxes to avoid any benefit reductions, they would pay over $10,000 a year just for Social Security" to keep the program solvent for 75 years.
SSA data shows the number of workers per retiree has declined markedly as Social Security has aged. (Photo by: Jeffrey Greenberg/Education Images/Universal Images Group via Getty Images / Getty Images)
"It would be a significant increase in the tax burden for these workers," Boccia said. "Think about what $2,000 or $3,000 a year buys – for some people, this is their annual grocery budget, for others it might be a car payment."
Boccia also said she doesn't think the payroll tax hike is realistic, saying "it would be incredibly economically destructive because of the extremely high marginal tax rates that it would impose on, say, small business owners, for example, where you would be at a level of taxation where you would actually collect less in taxes at a higher rate."
She explained that the so-called Laffer Curve effect would be in play, as the higher taxes would be "affecting incentives so measurably that people will work less and try to avoid that punitive level of tax states," noting that would be particularly true for high-tax states such as California and New York.
SOCIAL SECURITY CONFIDENCE HITS 15-YEAR LOW AS YOUNGER AMERICANS INCREASINGLY LOSE FAITH IN SYSTEM
Congress will have to find ways to reform Social Security as the insolvency of its trust funds draws near. (istock / iStock)
Boccia also said Congress is unlikely to allow benefit cuts to occur, which would mean lawmakers need to find more revenue or cost savings to stabilize the program. She noted other solutions that could be considered would be to raise taxes, increase borrowing and the national debt, or consider means-testing benefits for higher-income beneficiaries.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
"The longer Congress waits to reform Social Security, the more painful and consequential the remaining options on the table will be, because every year that Congress waits, certain options expire," Boccia said.