Congress has long delayed hard choices on Social Security, but the program’s funding shortfall is approaching and taxpayers are increasingly likely to shoulder the cost. A small but growing group of lawmakers has indicated openness to raising revenue through taxes to shore up Social Security, including some Republicans who have historically opposed tax increases. For decades the program was treated as the political “third rail,” with proposals to raise taxes or cut benefits provoking swift backlash. That dynamic appears to be shifting as retirees face the prospect of substantially smaller checks. Projections earlier this year showed the Social Security trust fund will run out of money sooner than previously expected, meaning benefits would face a 22% cut by 2032 unless adjustments are enacted. Payroll-tax revenue has not kept pace with benefit obligations, and the trust fund has been used to cover the gap. Once the trust fund is exhausted, Social Security will be limited to paying out only the payroll taxes it receives. Today, workers and employers each pay a 6.2% tax on wages up to $184,500 a year; earnings above that cap are not subject to the payroll tax, so high earners pay Social Security on a much smaller share of their income than middle- and lower-income workers. “We’ve got too many people who say, ‘Well, we have to stay within the current income level or stay at the current tax rate,’” Rep. Tom Cole, R-Okla., told the Washington Post earlier this month. “I’m willing to look at the tax rate. I am willing to raise the amount of income through tax.” Cole, the influential chairman of the House Appropriations Committee, said the arithmetic is beginning to outweigh the politics. “And believe me, you’ll have a lot bigger problem if it goes bankrupt than you’ll have keeping it whole, because people will feel cheated,” he added. Rep. Lloyd K. Smucker, R-Pa., suggested this month that raising the payroll-tax income cap could be part of the solution. Smucker, a leading candidate to be the top Republican on the House Budget Committee in the next Congress, said, “You’ll probably have to do something on the payroll half of the money being paid into the system,” according to Roll Call. He warned lawmakers cannot allow benefit cuts to happen in six years, and “the only way you address that is to start being serious and realistic about the math problem and the demographics.” Sen. Bernie Moreno, R-Ohio, joined Democratic Sen. Elizabeth Warren in a New York Times op-ed in June proposing payroll-tax changes. They noted most Americans earn less than the $184,500 cap, so Social Security taxes apply to 100% of those workers’ incomes while top earners pay only on a portion of theirs. “Why should a middle-class nurse pay a larger share of her paycheck than a wealthy corporate lawyer?” they wrote. “This is doubly unfair in an economy in which top earners’ wages, over time, have pulled far ahead of those of the average worker.” Moreno and Warren urged removing the tax cap, citing a Peter G. Peterson Foundation report that estimated such a change would generate about $3 trillion for the program over 10 years. Democratic Senate candidate Josh Turek of Iowa has also called for eliminating the cap, saying the wealthy “pay Social Security tax for the first few minutes of the year, but we have teachers… that are paying year-round.” Analysts say eliminating the cap would cover more than half of Social Security’s funding gap, but not all of it, according to the Committee for a Responsible Federal Budget. That leaves lawmakers with a choice: find additional revenue or accept cuts to benefits—though no major proposal on Capitol Hill is pushing benefit reductions. Sen. Sheldon Whitehouse, D-R.I., and Rep. Brendan Boyle, D-Pa., have offered an alternative revenue plan that would raise the payroll-tax income threshold to $400,000 and also subject investment earnings to the payroll levy. Another proposal from Sens. Bill Cassidy, R-La., and Tim Kaine, D-Va., would avoid immediate pain for beneficiaries and taxpayers by borrowing to create an investment fund. Their plan calls for the federal government to borrow $1.5 trillion to seed a fund invested in stocks and other risk assets, which they say would accumulate gains for 75 years and outperform Treasury bonds. At the same time, the Cassidy-Kaine approach would require roughly $25.1 trillion in additional borrowing to cover the gap between Social Security’s revenue and benefits during those 75 years. Returns from the investment fund would then be used to pay down the $26.6 trillion in new total borrowing. Boston College’s Center for Retirement Research ran simulations and concluded the senators’ plan is unlikely to work reliably. While long-term average equity returns could produce sufficient revenue, the market is volatile. “After incorporating the volatility in equity returns, however, the results show that the gamble does not always pay off,” authors Anqi Chen, Alicia Munnell and Jean-Pierre Aubry wrote in a report. This story was originally featured on Fortune.com
Source: fortune.com
