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How to bolster Social Security with no new taxes

Ramesh Ponnuru

By Ramesh Ponnuru

Published June 21,2018

How to bolster Social Security with no new taxes

Social Security is structured so that average benefits grow from one class of retirees to the next. We could bring the program a long way toward solvency without cutting benefits from their current levels. Merely moderating the growth of benefits, so that tomorrow's retirees do not get as large an increase over today's retirees as the current system offers, would produce large savings.


There are a variety of ways to do that. One, called "progressive indexing," would let benefits grow at the level of existing law for the lowest-income workers, moderate their growth for middle-income workers, and freeze them in inflation-adjusted terms for higher-earning workers.


When I made these points recently, I got a lot of pushback and follow-up questions from readers. So I'll respond here to the three concerns that many of you raised.


First: A number of readers thought I was talking about cost-of-living adjustments, and pointed out that they are tied to a measure of inflation. So an individual retiree's benefit does not grow, in inflation-adjusted terms, over time. This is true. I think that yearly cost-of-living adjustments should be more generous, so that retirees get more support when they are 85 than when they are 70.


But what I was discussing was the program's initial benefit levels, which are structured so that a person in the middle of the income distribution who retires 10 years from now gets a bigger check than a similar person who retires today.

Second: Some readers pointed out that since they pay higher taxes into Social Security when their wages go up, it is only fair that benefits rise in response to wage gains, too. Freeze benefits so that tomorrow's retirees get the same check, in inflation-adjusted terms, as today's, and those future retirees will be getting a worse deal from the program. They will pay more into the system than today's retirees did but get the same (inflation-adjusted) amount.


The observation is accurate. But since Social Security is underfunded, either promised benefits must decline or taxes have to go up, and the alternative of across-the-board payroll-tax increases would make the deal worse, too. The earliest generations to receive Social Security had a very favorable benefit-to-tax ratio. The need to pay for the benefits of earlier generations, rising longevity and falling birthrates all mean that the ratio has to deteriorate.


Third: As a few readers pointed out, I neglected one way to keep benefits growing, namely soaking the rich. The payroll tax that funds most of Social Security applies to the first $128,400 in wages. (That's for now; the number goes up each year, also at a rate higher than inflation.) Eliminating that cap would raise money for the program, especially if the people paying the new tax didn't get larger benefits in return.


While I should have mentioned this idea, I'm unenthusiastic about it. It's a very big increase in marginal tax rates. The federal marginal tax rate on high earners would go from 40.8 percent to 53.2 percent. In New York City, state and local taxes mean that the top marginal tax rate would go from 49.7 percent to 62.1 percent.

And if you use that tax increase to keep Social Security benefits growing, it means you can't use it to make Medicare solvent, or pay for infrastructure improvements, or fund cancer research, or anything else. In my view, making sure that tomorrow's affluent retirees have bigger Social Security checks than today's, and tomorrow's middle-class retirees have bigger checks than today's, should not be a top fiscal priority.


Which brings us to another issue. One of the arguments deployed against attempts to moderate the growth of Social Security benefits for the highest earners is that it would weaken the link between taxes paid and benefits received, and thereby reduce political support for the program. The theory is that when high earners pay a lot to Social Security but receive only a little in return, they will start to see it as a welfare program.


If that argument is sound, though, it doesn't just apply against proposals to reduce the benefits of affluent people. It also applies against proposals to raise their taxes without giving them any corresponding benefit increases. It may apply even more strongly, if we assume that high earners care more about their tax rates today than about the benefits they may receive in the future.


But if the argument is unsound - if, that is, we should not maintain foolish policies because of speculation about the possible political effects of abandoning them - then we should prefer moderating the benefit growth for high earners over raising their taxes. They are, after all, the people who should find it easiest to save for their own retirements. Let's tell them that they're responsible for doing more of it.

Ramesh Ponnuru has covered national politics and public policy for 18 years. He is an author and Bloomberg View columnist.

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