TAX HIKES OR SOCIAL SECURITY REFORM BEFORE 2042
February 9, 2005
President Bush points often to the fact that the Social Security trust fund will be exhausted in the year 2042. At that point, current projected revenues from the payroll tax will only cover about 75 percent of promised benefits. The implication is that benefits will either have to be cut across the board by 25 percent or the payroll tax rate will have to rise by about four percentage points.
However, the real reason to reform Social Security now is to prevent a massive income tax increase, says Bruce Bartlett:
- Social Security tax revenues will begin falling as a net contributor to federal revenues in 2008, when the surplus of Social Security taxes over benefits (which are now credited to the trust fund) will peak at 0.8 percent of the gross domestic product.
- After that, surplus payroll tax revenues will gradually fall to zero in 2018 and become negative thereafter.
- By 2045, the shortfall between Social Security taxes and benefits will equal 1.7 percent of gross domestic product.
What this means is that long before the trust fund is exhausted, income taxes will have to rise by an amount equal to difference between current Social Security revenues and benefits, says Bartlett:
- Income taxes will have to go up by about 2.5 percent of GDP between now and the date the trust fund is exhausted in order to redeem the bonds the trust fund holds, which will be cashed-in to pay benefits over and above Social Security taxes.
- That would be equivalent to raising income taxes by 34 percent this year.
Congress will never allow benefits to be cut suddenly or their taxes sharply raised, says Bartlett. The implicit tax increase will take place long before 2042.
Source: Bruce Bartlett, "Private Accounts = Trade-Off," National Center for Policy Analysis, February 9, 2005.
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