Social Security funding: Will urgency outweigh partisanship?

Last week, Rep. Tom Rice, a third-term Republican from South Carolina with a reputation as a fiscal conservative, stood before a room full of policy wonks on Capitol Hill and called his shot.

“Without a doubt, Social Security is a promise that will be kept—it is golden,” said Rice, a member of the Ways and Means Social Security subcommittee at a symposium hosted by the Committee for a Responsible Federal Budget.

That Rice, who is also a member of the House of Representatives’ conservative Republican Study Committee caucus, would guarantee Congress’—and his party’s–willingness to keep Social Security afloat is no small claim.

Some in conservative quarters have been calling for Social Security’s privatization for as long as actuaries have been pointing to the impending insolvency of its trust funds.

That push is evidence of conservatives’ contempt for the program, allege others in progressive quarters, and amounts to a back-door effort to roll Social Security back or replace it altogether.

For years, demagoguing from politicians in both parties has been the textbook play on Social Security.

That may be beginning to change. While Rice, Rep. John Larson, D-CT, and a panel of Social Security experts presented competing solutions on how to refortify Social Security’s trust funds, there was clear unanimity on one fact at CRFB’s event: a legislative fix must be bipartisan.

Maya MacGuineas, CRFB’s president, said that’s a reality more lawmakers are acknowledging, at least behind closed doors.

“Behind the scenes, there is willingness to do the hard work,” said MacGuineas, who also suggested that Social Security may be the policy issue with the greatest chance of finding bipartisan compromise.

“The sense of urgency should be obvious to everyone,” said Rep. Larson, the ranking member of the Social Security subcommittee. “There is an opportunity to drop the acrimony on both sides, roll up our sleeves, and come to a solution on something that should be quite easily resolved.”

Rebranding entitlement

Larson has authored legislation that would make Social Security’s trust funds solvent by raising payroll taxes 1 percent for employers and workers and applying payroll taxes to wages above $400,000. The Social Security 2100 Act would increase the minimum benefit to 125 percent of the poverty level.

The longstanding characterization of Social Security as an “entitlement” program has helped sow the ideological divide that has kept Congress from doing what has to be done, thinks Larson.

“Where some feel very strongly that Social Security is an entitlement program, it’s not. It’s an insurance program. It’s an insurance program that’s easily fixed,” he said.

Jason Fichtner, a senior research fellow at the Mercatus Center at George Mason University who previously served as the chief economist at the Social Security Administration, agreed with Larson’s suggestion to rebrand Social Security’s entitlement nomenclature, along with other program language that often unintentionally misleads the public.

But Fichtner pushed back on Larson’s plan for being too dependent on increased payroll taxes, suggesting it falls short of the compromise needed to reach a bipartisan solution.

Unlike the primary Republican Social Security bill on the table, Larson’s bill does not phase in an increase in the retirement age. The Social Security Reform Act of 2016, introduced by Rep. Sam Johnson, R-TX, does not increase payroll taxes, but does rely on increasing the retirement age. Social Security’s actuaries have said both bills would make the agency’s trust funds solvent. Rep. Rice said neither bill is workable on its own.

“Ten years ago, if we just lifted the payroll tax cap, it would have solved this issue. We don’t have that option any more. Now we have to look at raising the retirement age and adjusting COLAs (cost of living adjustments),” said Fichtner, citing a plan by the Bipartisan Policy Institute that splits new funding evenly between higher payroll taxes and phased increases in the retirement age.

“There has to be compromise somewhere in the middle,” added Fichtner. “With each passing year we miss an opportunity.”

Using an increase in the retirement age as a funding lever would disadvantage lower income workers, said Kathleen Romig, a senior policy analyst at the Center on Budget and Policy Priorities who previously was an analyst at Social Security and the Congressional Research Service.

“This is the most misunderstood area of Social Security policy,” said Romig.

The common justification for raising the retirement age is that people are living longer, said Romig. The average life expectancy when Social Security was made into law more than 75 years ago was 62. Actuaries now put life expectancy at 84 for men and 86 for women.

But that improved longevity is bunched among higher wage earners, she said.

“The high income half has seen impressive gains in longevity, but the bottom half hasn’t—we’ve actually seen some backward trends,” said Romig.

Increasing the retirement age by one year results in a 7 percent reduction in benefits, no matter when they are claimed, explained Romig.

“We have to make sure we are fair to people that are left behind,” added Romig, who said Congress has a 10-year window to address Social Security, and insisted any solution be bipartisan.

Alternatives to payroll tax

The Social Security Administration’s 2018 Trustee Report, released last week, projects the trust fund for the Old-Age and Survivors Insurance program will be exhausted by 2034.

Absent Congressional action, retirees will see a 23 percent reduction in scheduled benefits then.

If lawmakers wait until the trust fund is exhausted, payroll taxes would have to be increased to 16.27 percent of earnings, or nearly 4 percent, to provide for currently scheduled benefits. If Congress acted immediately, a 2.78 percent increase in payroll taxes would be needed to keep the trust fund solvent through the 75-year projection window, according to the Trustees’ Report.

While an increase in payroll taxes has been an assumed necessity in most prospective fixes for Social Security, the panelist at CRFB’s event floated alternative ideas on revenue sources.

“We want to tax the things you want less of, not the things you want more of,” said MacGuineas. “Taxing wages is far less desirable than taxing something like carbon.”

The panelists suggested a new carbon tax, value added tax, and an idea to increase the estate tax by Henry Aaron, an economist at the Brookings Institute, are potentially viable options to increasing payroll taxes.

“If you raise the payroll tax, I have now made labor more expensive for employers,” said Fichtner, who is not yet endorsing using a consumption or carbon tax to fund Social Security, but did say the ideas need to be discussed.

Romig raised the idea of applying the payroll tax to employer-provided health insurance premiums and other fringe benefits in the workplace. Employer-provided insurance is not subject to payroll taxes, and accounts for the largest expenditure in the tax code.

“One of the arguments for applying the payroll tax to fringe benefits—like employer-sponsored health insurance, FSAs, transit benefits, and cafeteria plans—is that we already do it with employer-sponsored retirement,” said Romig in a follow up email. Employee contributions to 401(k) plans are exempt from federal taxes, but not the payroll tax.

“We should create a safe space to discuss additional sources of revenue and changes to benefits for Social Security. And that would include how we tax fringe benefits,” said Fichtner in an email.

But he cautioned that new taxes on benefits like health savings accounts may discourage sound policy outside of Social Security.

“I’ll be consistent with my economic theory that we should tax things we want less of and not tax–or lower taxes–on things we want to encourage or see more of,” said Fichtner.

HSAs are designed to address the inherent inefficiencies in health care’s third-party payment system, noted Fichtner.

“They are supposed to encourage people to shop around, compare prices and become informed consumers – which will hopefully lead to better health care choices, lower health care costs and better health outcomes,” said Fichtner.

“If public policy shifts and HSA contributions become taxable, people might no longer see the advantage of an HSA and we’d then undermine the entire intent of why HSAs were created. Further, if we subject HSA contributions to payroll or income taxes and people stop using HSAs, then you also don’t raise any revenue, which is ultimately what I think would happen if we taxed HSAs,” he added.