by Lincoln Institute | May 23, 2024

Recently, the Congressional Budget Office released an analysis of the Social Security Trust Fund, saying that it would run out of money in nine years. The CBO then said that if nothing else were done, benefits would need to be cut by 20%. Can you imagine what a crisis that would be? So let’s propose to solve it right here, on American Radio Journal.

We will look at it first as a math problem, and only after we’ve understood the math, will we look at it as a political problem.

The fund is approaching insolvency because more dollars are flowing out as benefits than are flowing in as contributions. Therefore, to avoid insolvency, either fewer dollars must flow out or more dollars must flow in. The CBO’s announcement that a 20% benefit cut may be less than 10 years away may have been intended to shock people into taking the problem seriously, but it’s not the only way to address the problem, and certainly not the best way.

Under the current law, there’s no Social Security tax paid on earnings above $168,600, known as the earnings cap. It’s a flat tax up to the cap, so that all wage earners up to that max pay the same rate, which is currently 6.2%. The employer pays the same amount, so the actual contribution to the Social Security trust fund is 12.4% of wages. Self-employed wage earners pay both the worker’s 6.2 and the employer’s 6.2.

Flat taxes are, by definition, neither progressive nor regressive. Everyone pays the same rate. But above the earnings cap, the current system is regressive. Someone who earns twice the earnings cap pays a Social Security tax rate of only half of 6.2 %, or 3.1%. As a matter of basic social equity, where’s the morality in charging a tax rate of 6.2 % to a wage earner of $168,000 but only 3.1% to a $337,000 earner? I’m generally not in favor of progressive tax rates, but I recognize the inequity of regressive ones, and the current Social Security tax is regressive.

Simply staying with the current tax rate but eliminating the wage cap would keep the system solvent until nearly 2060, according to an excellent econometric model from the Committee for a Responsible Federal Budget, a genuinely bi-partisan public policy nonprofit. It can run various scenarios, and it’s eye-opening to see which tweaks work and which don’t.

Making one additional small change – changing the annual cost-of-Living annual adjustment to a different measure of consumer prices from the Bureau of Labor Statistics called Chained CPI that many economists favor as more accurate. It would extend the solvency fifty years, to 2074. That qualifies as a solution in my book.

Now to the politics. The two changes suggested here are, in my opinion, the easiest to sell politically. Only the top 15% of earners would see any increase as a result of eliminating the earnings cap, and they would also see an increase in their retirement benefits. The cost-of-living formula change still yields a fair increase in benefits each year resulting from inflation. Wage earners under $170,000 would see no increase, and should be easily persuaded to support the elimination of the earnings cap if it could save Social Security from imminent insolvency.

There are other proposals that would also achieve long-term solvency. The vast majority propose fixes that raise the retirement age or raise the Social Security tax rate, or both, but those are almost certainly more difficult to pass through Congress, and neither one is necessary.

One key political question is whether there’s a greater political benefit for fixing the social security solvency crisis than there is a political cost to supporting these two tweaks. I believe that there is.

President Biden has famously said that he wouldn’t raise taxes on anyone earning less than $400,000. This proposal would violate that pledge, but not by much.  The highest increase would be paid by someone making just under $400,000, and that increase would be less than $1,500. That’s a pretty small cost to ensure that Social Security is there for them when they’re eligible, especially if it also increased their payouts.

Democrats often support shifting more of any tax burden to the wealthiest taxpayers, so this modest but effective reform should garner easy support from Democrats. Republicans often oppose tax progressivity, and this plan can be sold to them as a flat tax, which it is.

If the Congress can be persuaded that solving a major problem brings more political benefits than kicking the proverbial can down the road, then it should be doable. Remember you heard it first here.

This has been Colin Hanna for American Radio Journal.