Social Security Solvency

Well, things have certainly changed since my last posting, so... we'll just do what I originally planned and let people with good ideas handle that. What I planned for was Social Security funding, so... here goes:

The What

The Social Security Trust Fund is expected to run out of money around 2031. It's currently funded by a 12.4% payroll tax, split evenly between employers and employees, levied on the first $137,700 we make. The reason for this limit is a 1994 change to the Internal Revenue Code (430(b)), setting the taxable maximum to $60,600 and adjusted with average wages ever since. All this leads up to the Social Security program having a 3.55% (of taxable payrolls) long-term funding gap (1% of taxable payrolls was projected to be roughly $63.8 Billion in 2020, excluding the pandemic/depression).

For Liberals:
If we don't fix the funding deficit, we won't be able to take care of our seniors and they'll face a ~20% benefit cut. To avoid a benefit cut, we'll need to raise taxes, especially on wealthy individuals, making the Social Security payroll tax less regressive.

For Conservatives:
If we raise some taxes, we can preserve what we currently have while reducing America's budget deficit. Raising more revenues through taxes, especially on higher-income people, will effectively "crowd-in" investment income, meaning more investment in US businesses, likely to create more jobs.

What to Do

Raise the tax rate, lower the benefit calculation for the highest earners while extending the taxable maximum, and implement a "donut-hole" tax.

Raising the Rate:

The current tax rate is 12.4%. My proposal: 13%. If a 1% increase yields $715.5 Billion in revenues throughout the 2020s, a 0.6% increase would yield 60% of that, or (715.5 x .6) $429.3 Billion through the 2020s.

With this said, the revenue-raising policies I've collected were all calculated at the current 12.4% tax rate. To fix this for our calculations, I'll have to impose a "recalculation ratio" of (1/12.4x13=) 1.048387.

Benefit Calculation and Taxable Maximum:

The current taxable maximum (the highest amount of income that can be taxed by the Social Security payroll tax) is $137,700 (as of 2020). If you make more than that, all the income above that is tax exempt (for the Social Security payroll tax). This tax has historically covered 90% of incomes. As of 2016, wage growth at the highest levels have expanded at such a rate that the 90th percentile now starts at $285,000. The Congressional Budget Office expects this to bring in $804.9 Billion over the next decade. Applying the recalculation ratio to the $804.9 Billion this payroll taxation increase leaves us with $843.85 Billion.

The CBO also expects this to cost $19.8 Billion in more benefits being paid out at the current 15% payout rate for wages that high. If we lowered the payout rate from 15% to 5% while expanding the tax base to $285,000, the top payout would remain roughly the same ($3261.50/month now vs. $3306.25/month). (If we raise this to $300,000 in income, we could raise $1270.64 Billion [$1212B * recalculation ratio] in revenues)

If we use the original lowered rate of 5%, we could save $7.4 Billion over the next decade (using the current tax base) while only affecting the top 13% of Social Security beneficiaries. If we also cut the $19.8 Billion in projected benefits from the tax base expansion by 2/3 (a reduction from 15% to 5%), we would effectively save $13.2 Billion. If we implement this top payout rate cut, we'd save a total of (13.2+7.4) $20.6 Billion.

In total, these options taken together would bring in and save a total of $864.45 Billion over the next decade to save Social Security.

The Donut Hole:

A "donut hole" tax is a tax that's implemented with a hole in the middle (like the hole in the middle of a donut... whoa). We could have one for Social Security, like what Joe Biden is proposing.

J'Biden is proposing a donut hole tax above $400,000 in payroll-based income. At the current rate of 12.4%, this is projected to raise $1035 Billion. Applying the recalculation ratio gives us $1085.08 Billion. Increased taxes without a connected benefit of some form distorts the labor supply (more taxes = people work less [especially at this high of income where people want to avoid higher tax rates]). To combat this, we could include the donut hole taxes in the payout. The Social Security 2100 Act does this at 2%, which would cost $4.03 Billion over the next decade.

The donut hole tax, at 13%, with a 2% payout connection, gives us $1081.05 Billion in new revenues.

The Total:

Initial Rate Increase: $429.3 Billion
Taxable Maximum to 90%: $864.45 Billion
Donut Hole Tax: $1081.05
Full Total: $2374.8 Billion or 3.32% of taxable payroll (the goal was 3.55%, so I'll call it close enough).

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