The dire findings of the 2015 report of the Trustees of the Social Security Administration has stirred public debate about whether a hike in the payroll tax rate can save Social Security. The Trustees' report once again alerts Congress to the looming insolvency of Social Security, now estimated by 2034, and of the Disability Insurance program, projected to become insolvent next year. The most expedient solution, if not the most practical, is to simply raise the payroll tax rate. Indeed, many have advocated just this.
Proponents of a tax hike claim that by raising the rate by 2.3%, we could insure the solvency of Social Security for another 75 years. But part of understanding the status of Social Security is recognizing the many assumptions and forecasts that are embodied in the Trustees' report. For instance, the Trustees' report projects that OASDI costs will rise to just 6.2% of GDP by 2089. Really, 2089? The Federal Reserve can't even predict GDP next quarter and the Trustees are projecting what GDP will look like 74 years from now? Let's get a grip, people.
When Social Security was originally imposed, payroll taxes were just 2% of the first $3,000 of wages and salary, or a maximum of just $60 per year (roughly $1,050 in current dollars). By 1960, however, the tax rate had already tripled, on its way to today's current level of 12.5% (with these amounts equally split between employer an employee). That puts the maximum worker contribution in 2015 at just under $7,500 (with an equal contribution by employers) or seven times greater than what the maximum worker contribution was when Social Security was first enacted (adjusted for inflation). In fact, payroll taxes have grown so dramatically it's now estimated that 82% of American households pay more in FICA payroll taxes than they do in federal income taxes. Yet despite this growth in payroll taxes, the 2015 Trustees report estimates that the OASDI, the Trust Fund for Social Security and Disability Insurance is underfunded on a present value basis, by $10.7 trillion.
In planning to raise the tax rate, we must also consider that in 2010, President Obama championed the idea of temporarily cutting the payroll tax rate, as a measure of economic stimulus for a then struggling US economy. Indeed we did, and the IRS gleefully provided the following statement to taxpayers:
"Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits." - IRS release, IR-2010-124, Dec. 17, 2010.
The New York Times ran a story that proclaimed,
"The biggest Christmas present that many people will get this year comes form the Federal Government, thanks to the tax bill that President Obama signed a week ago" - New York Times, December 24, 2010.
In 2011, pushing back on Republican opposition in Congress to extending the tax cut into 2012, President Obama challenged members of the GOP to "fight as hard for working class families as you do for those who are more fortunate". Who could resist?
So if a cut in the payroll tax rate provides economic stimulus by putting more dollars in Americans' pockets, particularly the pockets of working class families, wouldn't a tax hike do precisely the opposite, take money from workers paychecks and provide drag on the economy? Well, of course, it would. Americans like quick fixes, but I'm afraid solving Social Security will require a more elaborate plan than simply raising the tax rate.