Social Security Reform Would Benefit Workers

July 16, 2014

The Social Security program is in trouble. Since 2010, benefit payments have exceeded revenues, and the deficit is only growing. Workers retiring today have paid into the system more than they will get out of it, and future retirees will find themselves in an even worse position, explain Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving in a report from the National Center for Policy Analysis. 

To continue funding the program, the federal government has two options:

  • The government could keep the current benefit structure in place but increase the Social Security payroll tax by 3.3 percent. The authors refer to this as the baseline program.
  • Or, the government could impose a reform program, keeping tax rates the same but instituting two changes: Raising the retirement age for workers eligible for benefits starting in 2023 and making the benefit formula less generous to high earners.

Liu, Rettenmaier and Saving illustrate the financial consequences of each program to an average-earning man born in 1985:

  • The baseline option -- raising taxes and keeping the benefits structure in place -- would mean that such workers would pay 13.5 percent of their lifetime income in Social Security Taxes. In exchange, they will receive benefits equal to 9.6 percent of their income, resulting in a 3.8 percent net tax.
  • But in a reform program, those men would pay a 10.2 percent tax rate and receive benefits equal to 8.2 percent of their income, resulting in a lower tax of 2 percent.

Very low earners would gain under reform. A very low income earner born in 1985 would pay 13.5 percent of his income in taxes and receive benefits of 15.8 percent under the baseline program. Under a reform program, he would pay just 10.2 percent of his income in taxes and receive benefits worth 14.5 percent of his income -- resulting in net lifetime benefits of 4.3 percent of his earnings.

The authors suggest that policymakers use the reform option rather than the baseline option. The reform program would be smaller and would reduce the size of the federal budget. Additionally, the reform could include optional, individually directed retirement accounts that could increase retirees' savings.

Source: Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving, "How Social Security Reform Could Benefit Workers," Brief Analysis No. 798, National Center for Policy Analysis, July 16, 2014.

 

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