Advancing a Free Society

A Tax-Heavy Social Security Plan

Thursday, November 25, 2010

This past week, the Bipartisan Policy Center unveiled its Social Security reform proposal.  The proposal is a serious, constructive plan backed up by an impressive amount of analysis and documentation.  The authors of the proposal deserve tremendous credit for a useful addition to the public debate.

In my most recent piece for E21, I review the salient features of the BPC proposal.  The most striking feature of the plan is that it closes the Social Security financing gap mostly by increasing tax revenues.  The proposal would make a bit of headway in somewhat slowing the rapid projected growth of system costs over the critical next quarter-century, but over the long run would result in an more expensive Social Security system than even that projected under current law.

The main reason for this is the number of provisions that would both increase system revenues as well as its benefit obligations.  One provision would increase the cap on wages subject to the Social Security tax; another would gradually eliminate the tax exclusion for employer-provided health benefits; another would subject cafeteria plans to the Social Security tax; yet another would bring newly-hired state and local workers into Social Security.  Whatever the larger merits of these provisions, they would each increase Social Security revenues as well as its benefit obligations.  When the plan's additional benefit enhancements are added in, system costs over the long run would accelerate even more rapidly than under current law, despite the plan's other cost-containment provisions.

Social Security proposals represent value choices made by different proposal authors.  This particular proposal would close most of the program's long-run fiscal imbalance and also would attempt to better target benefits on those in greatest need, two important value judgments that many proposal authors share.  In the linked piece I mention several other potential objectives that the proposal does not address, including: containing projected cost growth; creating more transparent accounting; incorporating advance funding; and repairing work disincentives.  The BPC proposal is not alone in choosing not to focus on achieving pre-funding or on improving the program's work disincentives.  Many other proposals, however, would do much more to contain the system's growing cost burdens, and to ensure that the program's annual accounts are balanced over the long term irrespective of trust fund accounting conventions. As the linked piece explains, Social Security would still be running significant and growing annual deficits in later years under the BPC proposal; “solvency” would then be preserved in part by counting on future general taxpayers to make steadily increasing cash payments of interest from general revenues to the Social Security Trust Fund.

In essence, the BPC proposal is a proposal primarily to raise revenues to finance a Social Security system that steadily grows in cost, as the linked analysis explains in greater detail.