The Politics of Social Security Reform Now | American Enterprise Institute
At a recent hearing of the Senate Finance Committee on “Exploring Process Approaches for Addressing Social Security Solvency,” Ranking Member Senator Wyden said the following in his opening statement:
Democrats on this committee have put forward their ideas. Through our plans, Social Security can be secured indefinitely into the future without a single dime cut to a current or future retiree. […] That means no raising the retirement age, no cost-of-living haircuts, and no means-testing benefits. All we need to do is require billionaires, who have seen their wealth skyrocket to over $9 trillion this year while working people struggle with their grocery bills, to pay their fair share.
Senator Wyden appears to be referencing Senator Whitehouse’s April 2023 bill, the “Medicare and Social Security Fair Share Act.” Let’s examine the bill’s relevant provisions, its score by the Social Security actuary, and whether Senator Wyden’s statement is accurate today.
Under Senator Whitehouse’s bill, the combined OASDI payroll tax rate, currently 12.4 percent, would apply to covered earnings above $400,000, a level fixed and not indexed to average wage growth. Currently, taxable earnings are capped at $184,500, indexed to average wages; about 12 million of 181 million workers benefit from this provision. Under the proposal, all earnings would be taxed at 12.4 percent once the current-law taxable maximum exceeds $400,000, projected for 2048. Earnings above the higher of $400,000 or the current-law taxable maximum each year would not count toward benefits.
The second provision would expand the tax on net investment income (NII) as defined in the Affordable Care Act (ACA) to cover earnings from active S corporations and active limited partners. The ACA established a 3.8 percent tax on NII for personal income tax filers; applied to the lesser of NII and the excess of Modified Adjusted Gross Income (MAGI) above thresholds of $200,000 for single filers and $250,000 for married couples filing jointly (not indexed), deposited in the general fund. The provision also specifies an additional 12.4 percent tax payable to the Social Security Trust Funds, applied to the lesser of the expanded NII and the excess of MAGI over higher thresholds of $400,000 for singles and $500,000 for married couples; these thresholds are fixed and not indexed.
The actuary scored the first provision as reducing the long-range OASDI deficit by 2.26 percent of taxable payroll, and by 2.60 percent in the 75th projection year. He scored the second provision as reducing the long-range deficit by 1.79 percent, and by 2.22 percent in 75th projection year. Because the long-range actuarial deficit was projected in 2023 to be 3.61 percent (4.35 percent in the 75th projection year), the actuary declared that the Whitehouse bill achieved sustainable solvency, meaning that trust fund reserves would not be exhausted over 75 years and would be increasing as a percentage of the program’s annual cost by the end of the period.
It is noteworthy that the actuary foresaw a small behavioral response to the first provision, namely some employee compensation shifting to non-taxable forms, but apparently saw no behavioral response to the high tax rate in the second provision, such as lower savings rates, shifted asset allocations toward investments whose gains are realized less frequently, or lower capital accumulation leading to slower economic growth. Because the actuarial macroeconomic model does not include capital, one guesses the actuary used a simple ratio of total NII to GDP in his calculations, with some adjustment for the eventual lowering of the MAGI thresholds in real terms.
According to the 2023 actuarial description, one part of Senator Wyden’s statement is already inaccurate. The various tax increases would apply to far more people at the $400,000 earnings and MAGI levels than the thousand or so billionaires in the US. Indeed, because the thresholds are not indexed, they will eventually apply to tens of millions of upper middle-class and middle-class workers and taxpayers.
Moreover, the second part of his statement on indefinite security is now also highly likely inaccurate. Although the actuary gave the Whitehouse bill a sustainable solvency achievement in 2023, albeit on optimistic behavioral assumptions, it is unlikely she would do so in 2026. Owing to changes in the 2026 Trustees Report reducing the fertility rate and other factors, the long-range actuarial deficit is now projected to be 4.42 percent of taxable payroll, almost 7.0 percent by period’s end; GDP is then nearly 10 percent lower. My rough back-of-the-envelope calculation now gets solvency only through about 2060 for the Whitehouse bill.
It is a shame that there has been no movement on Social Security reform in the 25 years since President George W. Bush put it on the political agenda, as we approach the projected 2032 insolvency date. The most recent SFC hearing was disappointing, showing that political gridlock, evidenced by inaccurate statements, continues.
