NCPA - National Center for Policy Analysis

Reform Social Security Now Or Raise Taxes Later

June 14, 1999

There are indications that ultimately liberals will make higher taxes the cornerstone of their Social Security rescue plan.

By 2014, payroll tax revenues will equal expenditures; by the year 2034, Social Security revenues will only pay for 72 percent of projected benefits and the trust fund will be exhausted. Liberals know that the longer Congress waits to enact reform, the stronger their position will be, because privatization requires a long lead time to implement.

Signs are that liberals will propose higher taxes, as they did during the last big Social Security debate in 1983. Social Security faced a severe short-term financing problem and action had to be taken quickly. So even though the rescue plan was drafted by conservative Alan Greenspan, two-thirds of the financing gap was closed with higher revenues.

The Social Security Administration is already looking at various tax alternatives.

  • According to a May 18 memo, the main option under review appears to be elimination of the Social Security wage cap, so that payroll taxes would apply to all earnings rather than the first $72,600 as is the case now.
  • By not crediting the higher taxes toward higher benefits, this would eliminate 98 percent of the Social Security deficit for the next 75 years.
  • Another option would raise the cap so that 90 percent of all earnings would be taxed.

The burden of expanding the tax base, rather than cutting benefits, falls on the wealthy; according to the memo, three- fourths of the burden would fall on the top quintile, those with incomes above $51,918. By contrast, most benefit reduction options impose a disproportionate burden on the bottom quintile, those with incomes under $7,907.

Liberal Sen. Ted Kennedy (D-Mass.) is already pushing for lifting the Social Security wage cap.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 14, 1999.

 

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