Opinion Editorial

Monday, May 25, 1998  

Lifetime Net Tax Rate Will Rise

On April 28, the Social Security Board of Trustees released its latest report on Social Security finances. Although the program's finances improved ever so slightly from last year, the long term condition of the retirement system remains unsound.

To keep long-term revenues and expenditures in balance would require an immediate increase of 2.19 percent in the payroll tax rate. If no action is taken, Social Security will begin to run a cash deficit in about 2012, meaning that current revenues will be insufficient to pay current benefits. By 2032, the trust fund's assets will be exhausted, and at the end of the 75-year estimating period the system will be running a deficit equal to 2.2 percent of gross domestic product.

As bleak as the Social Security retirement system's prospects are, however, they are positively brilliant compared to the future of Medicare. The Trustees' report on Medicare's condition indicates that the hospital insurance (HI) portion of that system will be completely bankrupt as soon as the year 2008. The HI tax will have to rise from the present 2.9 percent to 7.8 percent by 2070 to keep the system in balance.

In short, unless there are fundamental changes to both the Social Security and Medicare systems, very large tax increases are in store for future workers. A new study by economists Jagadeesh Gokhale, Benjamin Page and John Sturrock, published by the Federal Reserve Bank of Cleveland, quantifies the impact.

  • Currently living workers can expect to pay about 30 percent of their lifetime income in net taxes; but future generations can expect to pay two-thirds more, almost 50 percent (see figure).

  • Net taxes takes account of both taxes paid and benefits received -- for example, a worker born in 1950 can expect to pay 43 percent of his or her lifetime income in taxes and receive 9.5 percent of it back in the form of Social Security and other government benefits, for a net lifetime tax rate of 33.4 percent.

  • The decline in the net tax rate for workers born in recent years is entirely due to the assumption of longer life spans and hence greater future medical benefits for those workers. Future workers, however, will have to bear those costs.

As bad as it looks for future workers, there is at least some reason for optimism. The improved budgetary situation has led to a reduction in the lifetime net tax rate on future generations of more than 35 percent since the last time the figure was calculated in 1994. At that time the net tax burden on future workers was estimated at an astonishing 84.4 percent.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), May 21, 1998.

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