Social Security: Democrats Want To Hike Payroll Taxes By $1.5 Trillion

Amid all the hoopla about Democrats wanting to raise taxes on the rich, they are quietly working on a bill that would increase taxes on every working family in America. Why? To fund expanded benefits for baby boomers hitting retirement.




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The Social Security 2100 Act would hike the combined payroll taxes paid by workers and their employers from 12.4% today to 14.8% by 2043. The bill would also apply the payroll tax on incomes over $400,000.

According to the Social Security Administration, in the first 12 years alone, this would amount to a $1.5 trillion tax hike.

A Staggering Social Security Tax Hike

Once the tax hike’s fully phased in, workers and employers will be paying $340 billion more a year in payroll taxes.

As a share of GDP, Social Security taxes would rise to 6.5%, up from the current 4.5%.

For families making the median income, it means paying an extra $720 a year to Social Security. But that’s only half the tax bite. The employer’s share effectively comes out of workers’ pockets as well, in the form of lower wages. So, the real increase is more like $1,400 a year.

It is, in other words, a staggering tax hike.

The economic effects of this hike will not be pleasant. Andrew Biggs, a scholar at the American Enterprise Institute, explained to the House Ways and Means Committee earlier this month, the impacts will likely be: a reduction in the labor supply, as well as less private savings and more household debt, particularly among lower-income families.

Biggs also notes that such a tax hike will raise far less money than predicted, not only because there will be fewer jobs, but because the payroll tax hikes will suppress wage growth, which will mean less income tax revenue.

The bill’s sponsor, Rep. John Larson, says that, even so, this plan will not only keep Social Security solvent, it will allow for a big increase in benefits.

More Social Security Benefits

Among other things, Larson wants an across-the-board increase in benefits for current and future retirees. A higher annual cost of living adjustment. And a stronger minimum benefit.

“The Social Security 2100 Act shows that Social Security is affordable,” Larson says. “It increases benefits and strengthens the Trust Fund, and it is fully paid for.” The bill has some 200 co-sponsors — all Democrats.

On paper, at least, Larson is correct.

Number crunchers at the Social Security Administration said that, even with the added benefits, the plan would keep the program solvent for at least the next 75 years.

But that’s just an educated guess. And not a very good one.

First, it doesn’t account for the negative effects the tax hike would have on jobs, wages and economic growth.

A Bad Track Record

Second, the Social Security Administration doesn’t exactly have a stellar record when it comes to making such long-term projections.

For example, in 1983, the federal government boosted Social Security taxes, and cut benefits. This was supposed to keep Social Security on a sound footing for 75 years or more. In fact, the Social Security Administration predicted that the program would be running annual surpluses until about 2025.


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In reality, Social Security started running annual deficits in 2010. By 2025, these annual shortfalls are on track to likely top $202 billion. The Trust Fund is now on track to become insolvent by 2034.

By expanding benefits now, and hoping the tax hikes will fill in the gap later, Larson risks only further destabilizing the program’s already shaky finances.

A Better Way

There’s a bigger problem with this plan, however.

Social Security is already too gargantuan. (It eats up 24% of the federal budget.) It takes too large a share of workers’ incomes, discouraging private savings. And for most people working today, it provides a lousy — often negative — rate of return.

Rather than expanding Social Security, the U.S. should be moving in the opposite direction through partial privatization. Let workers put more of their own hard-earned money in personal savings accounts that can’t help but perform better than Social Security.

After all, that’s what Sweden did in the 1990s, when it realized its public retirement program was going bankrupt.

And we all know how much Democrats love to compare the U.S. to countries like Sweden.

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