Tag Archives: Social Security

Trump’s Attack on Social Security

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Trump famously promised in his 2016 campaign for the presidency that he would never cut Social Security.  He just did.  How much is not yet clear.  It could be minor or it could be major, depending on how he follows up (or is allowed to follow up) on the executive order he signed on Saturday, August 8 while spending a weekend at his luxury golf course in New Jersey.  The executive order (one of four signed at that time) would defer collection of the 6.2% payroll tax paid by employees earning up to $104,000 a year for the pay periods between September 1 and December 31 (usefully straddling election day, as many immediately noted).

What would then happen on December 31?  That is not clear.  On signing the executive order, Trump said that “If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax.  I’m going to make them all permanent.”  He later added:  “In other words, I’ll extend beyond the end of the year and terminate the tax.”

The impact on Social Security and the trust fund that supports it will depend on how far this goes.  If Trump is re-elected and he then, as promised, defers beyond December 31 collection of the payroll tax that workers pay for their Social Security, the constitutional question arises of what authority he has to do this.  While temporary deferrals of collections are allowed during a time of crisis, what happens when the president says he will bar the IRS from collecting them ever?  The president swore in his oath of office that he would uphold the law, the law clearly calls for these taxes to be collected, and a permanent deferral would clearly violate that.  But would repeated “temporary” deferrals become a violation of the statutory obligations of a president?  And he has clearly already said that he wants to make the suspension permanent and to “terminate the tax”.

There is much, therefore, which is not yet clear.  But one can examine what the impact would be under several scenarios.  They are all adverse, undermining the system of retirement benefits that has served the country well since Franklin Roosevelt signed the program into law.

Some of the implications:

a)  Deferring the collection of the Social Security payroll taxes will lead to a huge balloon payment coming due on December 31:

The executive order that Trump signed directs that firms need not (and he wants that they should not) withhold from employee paychecks the 6.2% that goes to fund the employee share of the Social Security tax.  But under current law the taxes are still due, and would need to be paid in full by December 31.

Suppose firms did decide not to withhold the 6.2% tax, and instead allow take-home pay to rise by that amount over this four-month period straddling election day.  Unless deferred further, the total of what would have been withheld will now come due on December 31, in one large balloon payment.  For those on a two-week paycheck cycle, that balloon payment would have grown to 54% of their end of the year paycheck.  It is doubtful that many employees would be very happy to see that cut in end-year pay.  Plus how would firms collect on the taxes due on workers who had been with the firm but had left for any reason before December 31?  By tax law, the firms are still obliged to pay to the IRS the payroll taxes that were due when the workers were employed with them.

Hence most expect that firms will continue to withhold for the payroll taxes due, as they always have.  The firms would likely hold off on forwarding these payments to the IRS until December 31 and instead place the funds in an escrow account to earn a bit of interest, but they would still withhold the taxes due in each paycheck just as they always have (and as their payroll systems are set up to do).  This also then defeats the whole purpose of Trump’s re-election gambit.  Workers would not see a pre-election bump up in their take-home pay.

b)  But even in this limited impact scenario, there will still be a loss to the Social Security Trust Fund:

Thus there is good reason to believe that Trump’s executive order will likely be basically just ignored.  There would, however, still be a loss to the Social Security Trust Fund, although that loss would be relatively small.

Payroll taxes paid for Social Security go directly into the Social Security Trust Fund, where they immediately begin to earn interest (at the long-term US Treasury rate).  Based on what was paid in payroll taxes in FY2019 ($1,243 billion according to the Congressional Budget Office), and adjusting for the fewer jobs now due to the sharp downturn this year, the 6.2% component of payroll taxes due would generate approximately $40 billion in revenue each month.  Assuming the $160 billion total (over four months) were then all paid in one big balloon payment on December 31 rather than monthly, the Social Security Trust Fund would lose what it would have earned in interest on the amounts deferred.  At current (low) interest rates, the total loss to Social Security would come to approximately $250 million.  Not huge, but still a loss.

c)  If collection of the 6.2% payroll tax is deferred further, beyond December 31, the losses to the Social Security Trust Fund would then grow further, and exponentially, and become disastrous if terminated:

Trump promised that “if re-elected” he would defer collection by the IRS of the taxes due further, beyond December 31.  How much further was not said, but Trump did say he would want the tax to be “terminated” altogether.  This would of course be disastrous for Social Security.  Even if the employer share of the payroll tax for Social Security (an additional 6.2%) continued to be paid in (where what would happen to it is not clear), the loss to Social Security of the employee share would lead the Trust Fund to run out in less than six years.  At that point, under current law the amounts paid to Social Security beneficiaries (retirees and dependents) would be sharply scaled back, by 50% or more (assuming the employer share of 6.2% continued to be paid).

d)  Even if the Social Security Trust Fund were kept alive by Congress acting to replenish it from other sources of tax revenues, under current law individual benefits would be reduced on those who saw their payroll tax contributions diminished:

There is also an issue at the level of individual benefits, which I have not seen mentioned but which would be significant.  The extent of this impact would depend on the particular scenario assumed, but suppose that the payroll taxes that would have come due and collected from September 1 to December 31 were permanently suspended.  For each individual, this would affect how much they had paid in to the Social Security system, where benefits are calculated by a formula based on an individual’s top 35 years of earnings (with earnings from prior years adjusted to current prices as of the year of retirement eligibility based on an average wage inflation index).

The impact on the benefits any individual will receive will then depend on the individual’s wage profile over their lifetime.  Workers may typically have 20 or 25 or maybe even 30 years of solid earnings, but then also a number of years within the 35 where they may have been not working, e.g. to raise a baby, or were unemployed, or employed only part-time, or employed in a low wage job (perhaps when a student, or when just starting out), and so on.

There would thus be a good deal of variation.  In an extreme case, the loss of four months of contributions to the Social Security Trust Fund from their employment history might have almost no impact.  This would be the case where a worker’s income in their 36th year of employment history was very similar to what it was in their 35th, and the loss in 2020 of four months of employment history would lead to 2020 dropping out of their employment top 35 altogether.  But this situation is likely to be rare.

More likely is that 2020 would remain in the top 35 years for the individual, but now with four months less of payroll contributions being recorded.  One can then calculate how much their Social Security retirement benefits would be reduced as a result.

The formulae used can be found at the Social Security website (see here, here, and here).  Using the parameters for 2020, and assuming a person had earned each year the median wages for the year (see table 4.B.3 of the 2019 Annual Statistical Supplement of Social Security), one can calculate what the benefits would be with a full year of earnings recorded for 2020 and what they would be with four months excluded, and hence the difference.

In this scenario of median earnings throughout 35 years, annual benefits to the retiree would be reduced by $105 (from $17,411 without the four months of non-payment, to $17,306 with the four months of the payroll tax not being paid).  Not huge, but not trivial either when benefits are tied to a full 35 years of earnings.  That $105 annual reduction in benefits would have been in return for the one-time reduction of $669 in payroll taxes being paid (6.2% for four months where median annual earnings of $32,378 in 2019 were assumed to apply also in 2020 despite the economic downturn).  That is, the $669 not paid in now would lead to a $105 reduction in benefits (15.8%) each and every year of retirement (assuming retirement at the Social Security normal retirement age).

The loss in retirement benefits would be greater in dollar amount if the period of non-payment of the payroll tax were extended.  Assuming, for example, a scenario where it was extended for a full year (and one then had just 34 years of contributions being paid in, with the rest at zero), with wages at the median level throughout those now 34 years, the reduction in retirement benefits would be $316 each year (three times as much as for the four-month reduction).  Payroll taxes paid would have been reduced by $2,007 in this scenario, and the $316 annual reduction is again (given how the arithmetic works) 15.8% of the $2,007 one-time reduction in payroll taxes paid.

All this assumes Social Security would continue to pay out retiree benefits in accordance with current law and assumes the Trust Fund remained adequate.  The suspension of these payroll taxes would make this difficult, as noted above, unless there was then some general bailout enacted by Congress.  But any such bailout would raise further issues.

e)  If Congress were to appropriate funds to ensure the Social Security Trust Fund remained adequately funded, the resulting gains would be far greater for those who are well off than for those who are poor:

Suppose Congress allowed these payroll taxes to be “terminated”, as Trump has called for, but then appropriated funds to ensure benefits continued to be paid as per the current formulae.  Who would gain?

For at least this part of the transaction (the origin of the funds is not clear), it would be the rich.  The savings in the payroll taxes that would be paid in order to keep one’s benefits would be five times as high for someone earning $100,000 a year as for someone earning $20,000.  The tax is a fixed 6.2% for all earnings up to the ceiling (of $137,700 in 2020, after which the tax is zero).  The difference in terms of the benefits paid would be less, since the formulae for benefits have a degree of progressivity built-in, but one can calculate with the formulae that the change in benefits from such a Congressional bailout would still be 2.3 times higher for those earning $100,000 than for those earning $20,000.

One might question whether this is the best use of such funds.  Normally one would want that the benefits accrue more to the poor than to those who are relatively well off.  The opposite would be the case here.

f)  Importantly, none of this helps those who are unemployed:

Unemployment has shot up this year due to the mismanagement of the Covid-19 crisis, with the unemployment rate rising to a level not seen in the US since the Great Depression.  Unemployment insurance, expanded in this crisis, has proven to be a critical lifeline not only to the unemployed but also to the economy as a whole, which would have collapsed by even more without the expanded programs.

Yet cutting payroll taxes for those who have a job and are on a payroll will not help with this.  If you are on a payroll you are still earning a wage, and that wage is, except in rare conditions, the same as what you had been earning before.  You have not suffered, as the newly unemployed have, due to this crisis.  Why, then, should you then be granted, in the middle of this crisis where government deficits have rocketed to unprecedented levels, a tax cut?

It makes no sense.  Some other motive must be in play.

g)  This does make sense, however, if your intention is to undermine Social Security:

Trump pushed for a cut in the payroll taxes supporting Social Security when discussions began in July in the Senate on the new Covid-19 relief bill (the House had already passed such a bill in May).  But even the Republicans in the Senate said this made no sense (as did business groups who are normally heavily in favor of tax cuts, such as the US Chamber of Commerce), and they kept it out of the bill they were drafting.

The primary advisor pushing this appears to have been Stephen Moore, an informal (unpaid) White House advisor close to Trump.  He co-authored an opinion column in The Wall Street Journal just a week before Trump’s announcement advocating the precise policy of deferring collection of the Social Security payroll tax.  Joining Moore were Arthur Laffer (author of the repeatedly disproven Laffer Curve, whom Trump had awarded the Presidential Medal of Freedom in 2019), and Larry Kudlow (Trump’s primary economic advisor and a strong advocate of tax cuts).

Moore has long been advocating for an end to Social Security, arguing that individual retirement accounts (such as 401(k)s for all) would be preferable.  As discussed above, the indefinite deferral of collection of the payroll taxes that support Social Security would, indeed, lead to a collapse of the system.  Thus this policy makes sense if you want to end Social Security.  It does not otherwise.

Yet Social Security is popular, and critically important.  Fully one-third of Americans aged 65 or older depend on Social Security for 90% or more of their income in retirement.  And 20% depend on Social Security for 100% of their income in retirement.  Cuts have serious implications, and Social Security is a highly popular program.

Thus advocates for ending Social Security cannot expect that their proposals would go far, particularly just before an election.  But suspending the payroll taxes that support the program, with a promise to terminate those taxes if re-elected, might appear to be more attractive to those who do not see the implications.

The issue then becomes whether enough see what those implications are, and vote accordingly in the election.

What a Real Tax Reform Could Look Like – II: Social Security

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A.  Introduction

The previous post on this blog looked at what a true tax reform could look like, addressing issues pertaining to corporate and individual income taxes.  This post will look at what should be done for Social Security and the taxes that support it.  Our federal tax system involves more than just income taxes.  Social Security taxes are important, and indeed many individuals pay more in Social Security taxes than they do in individual income taxes.  Overall, Social Security taxes account for just over a quarter of total federal revenues collected in FY2017, and are especially important for the poor and middle classes.  With a total tax of 12.4% for Social Security (formally half paid by the employee and half by the employer, but in reality all ultimately paid by the employee), someone in the 10% income tax bracket is in fact paying tax at a 22.4% rate on their wages, someone in a 15% bracket is actually paying 27.4%, and so on up to the ceiling on wages subject to this tax of $128,400 in 2018.  They also pay a further 2.9% tax on wages for Medicare (with no ceiling), but this post will focus just on the Social Security side.

And as is well known, the Social Security Trust Fund is forecast to be depleted by around 2034 if Congress does nothing.  Social Security benefits would then be automatically scaled back by about 22%, to a level where the then current flows going into the Trust Fund would match the (cut-back) outflows.  This would be a disaster for many.  Congress needs to act.

A comprehensive tax reform thus should include measures to ensure the Social Security Trust Fund remains solvent, and is at a minimum able, for the foreseeable future, to continue to pay its obligations in full.  Also, and as will be discussed below, Social Security benefit payments are embarrassingly small.  Cutting them further is not a “solution”.  And despite their small size, many now depend on Social Security in their old age, especially as a consequence of the end of most private company defined benefit pension schemes in recent decades.  We really need to look at what can be done to strengthen and indeed expand the Social Security safety net.  The final section below will discuss a way to do that.

B.  Remove the Ceiling on Wages Subject to Social Security Tax

As was discussed in an earlier post on this blog, the Social Security Trust Fund is forecast to run out by around 2034 not because, as many presume, baby boomers will now be retiring, nor because life expectancies are turning out to be longer.  Both of these factors were taken into account in 1983, when following recommendations made by a commission chaired by Alan Greenspan, Social Security tax rates were adjusted and other measures taken to ensure the Trust Fund would remain solvent for the foreseeable future.  Those changes were made in full awareness of when the baby boomers would be retiring – they had already been born.  And while life expectancy has been lengthening, what matters is not whether life expectancy has been growing longer or not, but rather whether it has been growing to be longer than what had earlier been forecast when the changes were made in 1983.  And it hasn’t:  Life expectancy has turned out to be growing more slowly than earlier forecast, and for some groups has actually been declining.  In itself, this would have lengthened the life of the Social Security Trust Fund over what had been forecast.  But instead it was shortened.

Why is it, then, that the Trust Fund is now forecast to run out by around 2034 and not much later?  As discussed in that earlier post, the Greenspan Commission assumed that wage income inequality would not change going forward.  At the time (1983) this was a reasonable assumption to make, as income inequality had not changed much in the post World War II decades leading up to the 1980s.  But from around 1980, income distribution worsened markedly following the Reagan presidency.  This matters.  Wages above a ceiling (adjusted annually according to changes in average nominal wages) are exempted from Social Security taxes.  But with the distribution of wages becoming increasingly skewed (in favor of the rich) since 1980, adjusting the ceiling according to changes in average wages will lead to an increasing share of wages being exempted from tax.  An increasing share of wage income has been pulled into the earnings of those at the very top of the income distribution, so an increasing share of wages has become exempt from Social Security taxes.  As a direct consequence, the Social Security Trust Fund did not receive the inflows that had been forecast.  Thus it is now forecast to run out by 2034.

Unfortunately, we cannot now go back in time to fix the rates and what they covered to reflect the consequences of the increase in inequality.  Thus what needs to be done now has to be stronger than what would have been necessary then.  Given where we are now, one needs to remove the ceiling on wages subject to the Social Security tax altogether to ensure system solvency.  If that were done, the depletion of the Social Security Trust Fund (with all else unchanged, including the benefit formulae) would be postponed to about 2090.  Given the uncertainties over such a time span (more than 70 years from now), one can say this is for the foreseeable future.

The chart at the top of this post (taken from the earlier blog post on this issue) shows the paths that the Social Security Trust Fund to GDP ratio would take.  If nothing is done, the Trust Fund would be depleted by around 2034 and then turn negative (not allowed under current law) if all benefits were continued to be paid (the falling curve in black).  But if the ceiling on wages subject to tax were removed, the Trust Fund would remain positive (the upper curves in blue, where the one in light blue incorporates the impact of the resulting benefit changes under the current formulae, as benefits are tied to contributions).

As discussed in that earlier blog post, the calculations indicate the Social Security Trust Fund then would remain solvent to a forecast year of about 2090.  That is over 70 years from now, and the depletion at that time is largely driven by the assumption (by the Social Security demographers) on how fast life expectancy is forecast to rise in the future.  This could again be over-estimated.

Lifting the ceiling on wages subject to Social Security tax would also be equitable:  The poor and middle classes are subject to the 12.4% Social Security tax on all of their wages; a rich person should be similarly liable for the tax on all of his or her earnings.  And I cannot see the basis for any argument that a rich person making a million dollars a year cannot afford the tax, while a poor person can.

C.  Apply the Social Security Tax to All Forms of Income, Not Just Wages, and Then Raise Benefits

But I would go further.  In the modern era, there is no reason why the Social Security tax should be applied solely to wage earnings, while earnings from wealth are not taxed at all.  As one of the basic principles of taxation noted in the previous post on tax reform, all forms of income should be taxed similarly, and not with differing rates applied to one form (e.g. 12.4% on wages) as compared to another (e.g. 0% on income from wealth).

Broadening the base would allow, if nothing else is changed, for a reduction in the rate to produce the same in revenues.  We can calculate roughly what that lower rate would be.  Making use of IRS data for incomes reported on the Form 1040s in 2015 (the most recent year available), one can calculate that if Adjusted Gross Income (line 37 of Form 1040) was used as the base for the Social Security tax rather than just wages, the Social Security tax rate could be cut from 12.4% to 8.6% to generate the same in revenues.  That is, taxing all reported income (including income from wealth) at an 8.6% rate (instead of taxing just wages at 12.4%) would generate sufficient revenues for the Social Security Trust Fund to remain solvent for the foreseeable future.  This would be a more than 30% fall in the taxes on wages, but also, of course, a shift to those who also earn a substantial share of their income from wealth.

[Note:  There would also be second-order effects as Social Security benefits paid are tied to the taxes paid over the highest 40 years of an individual’s earnings, there is some progressivity in the formulae used, and taxes on all earnings rather than just on wages will shift the share of the taxes paid towards the rich.  But the impact of these second-order effects would be relatively small.  Also, the direction of the impact would be that the break-even tax rate could be cut a bit further to allow for the same to be paid out in benefits, or a bit more in benefits could be paid for the same tax rate.  But given that the impact would be small, we will leave them out of the calculations here.]

The 8.6% tax on all forms of income would generate the revenues needed to keep the Social Security Trust Fund solvent at the benefit levels as defined under current law.  But Social Security benefit payments are embarrassingly small.  Using figures for September 2017 from the Social Security Administration, the average benefit paid (in annualized terms) for all beneficiaries is just $15,109, for retired workers it is $16,469, and for those on disability it is $12,456.  These are not far above (and for disability indeed a bit below) the federal poverty guideline level of $13,860 in 2017 for a single individual.  And the average benefit levels, being averages, mean approximately half of the beneficiaries are receiving less.

Yet even at such low levels, Social Security benefits account for 100% of the income of 20% of beneficiaries aged 65 or higher; for 90% or more of the incomes of 33% of those aged beneficiaries, and 50% or more of the incomes of 61% of those aged beneficiaries (data for 2014; see Table 9.A1).  And for those aged 65 or older whose income is below the federal poverty line, Social Security accounts for 100% of the income of 50% of them, for 90% or more of the income of 74% of them, and for 50% or more of the income for 93% of them (see Table 9.B8).  The poor are incredibly dependent on Social Security.

Thus we really should be looking at a reform which would allow such benefit payments to rise.  The existing levels are too low to serve as an effective safety net in a country where defined benefit pension plans have largely disappeared, and the alternative approach of IRAs and 401(k)s has failed to provide adequate pensions for many if not most workers.

Higher benefits would require higher revenues.  To illustrate what might be done, suppose that instead of cutting the Social Security tax rate from the current 12.4% to a rate of 8.6% (which would just suffice to ensure the Trust Fund would remain solvent at benefit levels as defined under current law), one would instead cut the tax rate just to 10.0%.  This would allow average Social Security benefits to rise by 15.8% (= 10.0%/8.6%, but based on calculations before rounding).  One can work out that based on the distribution of Social Security benefit payments in 2015 (see table 5.B6 of the 2016 Annual Statistical Supplement), that if benefits were raised by 5% for the top third of retirees receiving Social Security and by 10% for the middle third, then the extra revenues would allow us to raise the average benefit levels by 45% for the bottom (poorest) third:

Annual Social Security Benefits

Avg in 2015

% increase

New

Difference

   Bottom Third of Retirees

$8,761

45%

$12,733

   $3,972

   Middle Third of Retirees

$16,010

15%

$18,411

   $2,401

   Top Third of Retirees

$23,591

5%

$24,771

   $1,180

Overall for Retirees

$16,044

15.8%

$18,574

   $2,531

This would make a significant difference to those most dependent in their old age on Social Security.  The poorest third of retirees receiving Social Security received (in December 2015 and then annualized) a payment of just $8,761 per year.  Increasing this by 45% would raise it to $12,733.  While still not much, it would be an increase of almost $4,000 annually.  And for a married couple where both had worked and are now receiving Social Security, the benefits would be double this.  It would make a difference.

D.  Conclusion

Conservatives have long been opposed to the Social Security system (indeed since its origin under Roosevelt), arguing that it is a Ponzi scheme, that it is unsustainable, and that the only thing we can do is to scale back benefits.  None of this is true.  Rather, Social Security has proven to be a critically important support for the incomes of the aged.  An astonishingly high share of Americans depend on it, and its importance has only increased with the end of defined benefit pension schemes for most American workers.

But there are, indeed, problems.  Due to the ceiling on wages subject to Social Security tax, and the sharp increase in inequality starting in the 1980s under Reagan and continuing since, an increasing share of wages in the nation have become exempt from this tax.  As a consequence, and if nothing is done, the Trust Fund is now forecast to run out in 2034.  This would trigger a scaling back of the already low benefits by 22%.  This would be a disaster for many.

Lifting the ceiling on wages, so that all wages are taxed equally, would resolve the Trust Fund solvency issue for the foreseeable future (to a forecast year of about 2090).  Benefits as set under the current formulae could then be maintained.  Furthermore, if the base for the tax were extended to all forms of income (including income from wealth), and not limited just to wages, benefits as set under current formulae could be sustained with the tax rate cut from the current 12.4% to a new rate of just 8.6%.

But as noted above, current benefits are low.  One should go further.  Cutting the rate to just 10%, say, would allow for a significant increase in benefits.  Focussing the increase on the poorest, who are most dependant on Social Security in their old age, a rate of 10% applied to all forms of income would allow benefits to rise by 5% for the top third of retirees, by 15% for the middle third, and by a substantial 45% for the bottom third.  This would make a real difference.

Social Security Could be Saved With the Revenues Lost Under the Trump Tax Plan

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As is well known, the Social Security Trust Fund will run out in about 2034 (plus or minus a year) if nothing is done.  “Running out” means that the past accumulated stock of funds paid in through Social Security taxes on wages, plus what is paid in each year, will not suffice to cover what is due to be paid out that year to beneficiaries.  If nothing is done, Social Security payments would then be scaled back by 23% (in 2034, rising to 27% by 2091), to match the amount then being paid in each year.

This would be a disaster.  Social Security does not pay out all that much:  An average of just $15,637 annually per beneficiary for those in retirement and their survivors, and an average of just $12,452 per beneficiary for those on disability (all as of August 2017).  But despite such limited amounts, Social Security accounts for almost two-thirds (63%) of the incomes of beneficiaries age 65 or older, and 90% or more of the incomes of fully one-third of them.  Scaling back such already low payments, when so many Americans depend so much on the program, should be unthinkable.

Yet Congress has been unwilling to act, even though the upcoming crisis (if nothing is done) has been forecast for some time.  Furthermore, the longer we wait, the more severe the measures that will then be necessary to fix the problem.  It should be noted that the crisis is not on account of an aging population (one has pretty much known for 64 years how many Americans would be reaching age 65 now), nor because of a surprising jump in life expectancies (indeed, life expectancies have turned out to be lower than what had been forecast).  Rather, as discussed in an earlier post on this blog, the crisis has arisen primarily because wage income inequality has grown sharply (and unexpectedly) since around 1980, and this has pulled an increasing share of wages into the untaxed range above the ceiling for annual earnings subject to Social Security tax ($127,200 currently).

But Congress could act, and there are many different approaches that could be taken to ensure the Social Security Trust Fund remains adequately funded.  This post will discuss just one.  And that would be not to approve the Trump proposal for what he accurately calls would be a huge cut in taxes, and use the revenues that would be lost under his tax plan instead to shore up the Social Security Trust Fund.  As the chart at the top of this post shows (and as will be discussed below), this would more than suffice to ensure the Trust Fund would remain in surplus for the foreseeable future.  There would then be no need to consider slashing Social Security benefits in 2034.

The Trump tax plan was submitted to Congress on September 27.  It is actually inaccurate to call it simply the Trump tax plan as it was worked out over many months of discussions between Trump and his chief economic aides on one side, and the senior Republican leadership in both the Senate and the Congress on the other side, including the chairs of the tax-writing committees.  This was the so-called “Gang of Six”, who jointly released the plan on September 27, with the full endorsement of all.  But for simplicity, I will continue to call it the Trump tax plan.

The tax plan would sharply reduce government revenues.  The Tax Policy Center (TPC), a respected bipartisan nonprofit, has provided the most careful forecast of the revenue losses yet released.  They estimated that the plan would reduce government revenues by $2.4 trillion between 2018 and 2027, with this rising to a $3.2 trillion loss between 2028 and 2037.  The lost revenue would come to 0.9% of GDP for the 2018 to 2027 period, and 0.8% of GDP for the 2028 to 2037 period (some of the tax losses under the Trump plan are front-loaded), based on the GDP forecasts of the Social Security Trustees 2017 Annual Report (discussed below).  While less than 1% of GDP might not sound like much, such a revenue loss would be significant.  As we will see, it would suffice to ensure the Social Security Trust Fund would remain fully funded.

The chart at the top of this post shows what could be done.  The curve in green is the base case where nothing is done to shore up the Trust Fund.  It shows what the total stock of funds in the Social Security Trust Fund have been (since 1980) and would amount to, as a share of GDP, if full beneficiary payments would continue as per current law.  Note that I have included here the trust funds for both Old-Age and Survivors Insurance (OASI) and for Disability Insurance (DI).  While technically separate, they are often combined (and then referred to as OASDI).

The figures are calculated from the forecasts released in the most recent (July 2017) mandated regular annual report of the Board of Trustees of the Social Security system.  Their current forecast is that the Trust Fund would run out by around 2034, as seen in the chart.

But suppose that instead of enacting the Trump tax plan proposals, Congress decided to dedicate to the Social Security Trust Funds (OASDI) the revenues that would be lost as a consequence of those tax cuts?  The curve in the chart shown in red is a forecast of what those tax revenue losses would be each year, as a share of GDP.  These are the Tax Policy Center estimates, although extrapolated.  The TPC forecasts as published showed the estimated year-by-year losses over the first ten years (2018 to 2027), but then only for the sum of the losses over the next ten years (2028 to 2037).  I assumed a constant rate of growth from the estimate for 2027 sufficient to generate the TPC sum for 2028 to 2037, which worked out to a bit over 6.1%.  I then assumed the revenue losses would continue to grow at this rate for the remainder of the forecast period.

Note this 6.1% growth is a nominal rate of growth, reflecting both inflation and real growth.  The long-run forecasts in the Social Security Trustees report were for real GDP to grow at a rate of 2.1 or 2.2%, and inflation (in terms of the GDP price index) to grow at also 2.2%, leading to growth in nominal GDP of 4.3 or 4.4%.  Thus the forecast tax revenue losses under the Trump plan would slowly climb over time as a share of GDP, reaching 2% of GDP by about 2090.  This is as one would expect for this tax plan, as the proposals would reduce progressivity in the tax system.  As I noted before on this blog and will discuss further below, most of the benefits under the Trump tax plan would accrue to those with higher incomes.  However, one should also note that the very long-term forecasts for the outer years should not be taken too seriously.  While the trends are of interest, the specifics will almost certainly be different.

If the tax revenues that would be lost under the Trump tax plan were instead used to shore up the Social Security Trust Fund, one would get the curve shown in blue (which includes the interest earned on the balance in the Fund, at the interest rates forecast in the Trustees report).  The balance in the fund would remain positive, never dipping below 12% of GDP, and then start to rise as a share of GDP.  Even if the TPC forecasts of the revenues that would be lost under the Trump plan are somewhat off (or if Congress makes changes which will reduce somewhat the tax losses), there is some margin here.  The forecast is robust.

The alternative is to follow the Trump tax plan, and cut taxes sharply.  As I noted in my earlier post on this blog on the Trump tax plan, the proposals are heavily weighted to provisions which would especially benefit the rich.  The TPC analysis (which I did not yet have when preparing my earlier blog post) has specific estimates of this.  The chart below shows who would get the tax cuts for the forecast year of 2027:

The estimate is that 87% of the tax revenues lost under the Trump plan would go to the richest 20% of the population (those households with an income of $154,900 or more in 2027, in prices of 2017).  And indeed, almost all of this (80% of the overall total) would accrue just to the top 1%.  The top 1% are already pretty well off, and it is not clear why tax cuts focused on them would spur greater effort on their part or greater growth.  The top 1% are those households who would have an annual income of at least $912,100 in 2027, in prices of 2017.  Most of them would be making more than a million annually.

The Trump people, not surprisingly, do not accept this.  They assert that the tax cuts will spur such a rapid acceleration in growth that tax revenues will not in fact be lost.  Most economists do not agree.  As discussed in earlier posts on this blog, the historical evidence does not support the Trumpian view (the tax cuts under Reagan and Bush II did not lead to any such acceleration in growth; what they did do is reduce tax revenues); the argument that tax cuts will lead to more rapid growth is also conceptually confused and reveals a misunderstanding of basic economics; and with the economy having already reached full employment during the Obama years, there is little basis for the assertion that the economy will now be able to grow at even 3% a year on average (over a mulit-year period) much less something significantly faster.  Tax cuts have in the past led to cuts in tax revenues collected, not to increases, and there is no reason to believe this time will be different.

Thus Congress faces a choice.  It can approve the Trump tax plan (already endorsed by the Republican leadership in both chambers), with 80% of the cuts going to the richest 1%.  Or it could use those revenues to shore up the Social Security Trust Fund.  If the latter is done, the Trust Fund would not run out in 2034, and Social Security would be able to continue to pay amounts owed to retired senior citizens and their survivors, as well as to the disabled, in accordance with the commitments it has made.

I would favor the latter.  If you agree, please call or write your Senator and Member of Congress, and encourage others to do so as well.

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Update, October 22, 2017

The US Senate passed on October 19 a budget framework for the FY2018-27 period which would allow for $1.5 trillion in lost tax revenues over this period, and a corresponding increase in the deficit, as a consequence of new tax legislation.  It was almost fully a party line vote (all Democrats voted against it, while all Republicans other than Senator Rand Paul voted in favor).  Importantly, this vote cleared the way (under Senate rules) for it to pass a new tax law with losses of up to $1.5 trillion over the decade, and pass this with only Republican votes.  Only 50 votes in favor will be required (with Vice President Pence providing a tie-breaking vote if needed).  Democrats can be ignored.

The loss in tax revenues in this budget framework is somewhat less than the $2.4 trillion that the Tax Policy Center estimates would follow in the first decade under the Trump tax plan.  But it is still sizeable, and it is of interest to see what this lesser amount would achieve if redirected to the Social Security Trust Fund instead of being used for tax cuts.

The chart above shows what would follow.  It still turns out that the Social Security Trust Fund would be saved from insolvency, although just barely this time.

One has to make an assumption as to what would happen to tax revenues after 2027, as well as for what the time pattern would be for the $1.5 trillion in losses over the ten years from FY2018 to 27.  With nothing else available, I assumed that the losses would grow over time at the same rate as what is implied in the Tax Policy Center estimates for the losses in the second decade of the Trump tax plan as compared to the losses in the final year of the first decade.  As discussed above, these estimates implied a nominal rate of growth of 6.1% a year.  I assumed the same rate of growth here, including for the year to year growth in the first decade (summing over that decade to $1.5 trillion).

The result again is that the Social Security Trust Fund would remain solvent for the foreseeable future, although now just marginally.  The Trust Fund (as a share of GDP) would just touch zero in the years around 2080, but would then start to rise.

We therefore have a choice.  The Republican-passed budget framework has that an increase in the fiscal deficit of $1.5 trillion over the next decade is acceptable.  It could be used for tax cuts that would accrue primarily to the rich.  Or it could be used to ensure the Social Security system will be able, for the foreseeable future, to keep to its commitments to senior citizens, to their survivors, and to the disabled.