Opinion Editorial | |
| Monday, December 14, 1998 | |
Social Security Reform Should Relieve The Payroll Tax Burden
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At last week's White House conference on Social Security, most of the discussion concerned benefits. Supporters of reform talked about how workers can receive higher benefits by investing some of their payroll taxes in private accounts, while opponents talked about the need to protect current retirees and the important role that Social Security plays in redistributing income. Neither side talked much about the Social Security tax. Yet it is the rising burden of this tax that is actually the best reason to reform Social Security. For many years, economists ignored the payroll tax. They took the view that it was a "contribution" not a tax, because workers received a specific monetary benefit for their Social Security payments. In other words, economists saw the payroll tax as equivalent to deductions from one's paycheck for health and life insurance, 401(k) plans or any of the other items that reduce a worker's cash wages but are actually part of their income. In the early years of the Social Security program, this was a reasonable assumption. Workers got back large benefits relative to their contributions and the tax rate was low. But as time has gone by, the payroll tax rate has risen from 1 percent to 7.65 percent on both employers and employees. The vast majority of those paying income and payroll taxes now pay far more of the latter than the former (see figure). Overall, three-fourths of workers pay more payroll taxes than income taxes. At the same time, the burden of the payroll tax has risen as the value of Social Security benefits has fallen for recent and future retirees. Workers in the Baby Boom generation will barely get back what they paid in and Generation X workers will do even worse. Thus over time Social Security payments have been converted into more of a tax and less of a "contribution." This means that the negative economic effects of the payroll tax have risen even more than the actual tax rate. Many economists now believe that the payroll tax is a greater drag on employment and economic growth than the corporate or individual income taxes. Despite the obvious need to reduce the burden of the payroll tax, some politicians are trying to increase it. They want the payroll tax to apply to all income, not just the first $68,400 of wages. They believe this will help shore-up Social Security's finances and obviate the need for fundamental reform. In truth, this will only stifle economic growth and in the long run make Social Security's finances more precarious. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 14, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
