Reform Social Security To Relieve The Payroll Tax Burden
December 14, 1998
At last week's White House conference on Social Security, 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 redistribute income. However, the rising burden of the Social Security payroll tax is actually the best reason to reform Social Security.
In the early years of the Social Security program, 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.
- Overall, three-fourths of workers pay more payroll taxes than income taxes.
As the burden of the payroll tax has risen, the value of Social Security benefits has fallen for recent and future retirees. Baby Boom workers will barely get back what they paid in and Gen- Xers will do even worse. 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 this, some politicians are trying to increase the payroll tax burden. 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.
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