Government

Fixing Social Security with workers health benefits

There is no denying two things. Social Security is on a path to running out of money and the U.S. has a growing deficit and debt problem.  Of course, there are those politicians who do deny both or choose to ignore them. 

Here’s an idea with merit to consider. Those of us with employer based coverage won’t be so happy, but if you want to know what fair share means, this may be it. 

Just remember one thing, Social Security is heading toward fiscal failure regardless of what any politician tells you. There is no surplus. The only reason full benefits are being paid now is because the trust is using interest earned on trust assets. 

Wall Street Journal 7-20-17

. . . Both of these problems can be solved by correcting an anomaly in the current tax system. Health insurance that employees receive from their employer is not currently subject to either the income tax or the payroll tax. Sixty percent of American employers collectively spend more than $1 trillion a year to provide such benefits.

If these benefits were subject to the payroll tax like all other forms of employee compensation, the government would collect an extra $135 billion this year. That extra revenue would be automatically credited directly to the Social Security trust fund.
These extra payroll-tax receipts would reduce the overall budget deficit over the next decade by as much as $1.7 trillion and would add that much to the Social Security trust fund.

By 2030 the trust fund balance would continue to grow to $2.7 trillion and the national debt would be $2.7 trillion smaller than it would otherwise be.

A flush trust fund would allow the Social Security program to be put on firmer financial footing, just as it was after the 1983 reform gradually raised the age for full retirement benefits from 65 to 67. Since 1983 the average life expectancy of Americans in their 60s has increased by three years, suggesting that the age for full benefits might be raised now from 67 to 70 for those who are currently younger than 50.

The combination of the payroll revenue achieved by the three year delay in retirement eligibility and the 13 years of extra GDP growth by 2030 would raise the payroll-tax revenue in 2030 by about $260 billion, or 1% of projected GDP, implying a reduction of that year’s budget deficit by the same amount.

Taxing employer payments for health insurance would create better incentive effects than increasing personal income-tax rates. Because the tax would be applied to existing benefits, it would not raise marginal rates and therefore would not reduce the incentive to work or to invest.

The direct effect of taxing employer payments for health insurance would be to make such benefits more expensive to employees, accelerating the trend toward policies with higher deductibles and copayments. That in turn would help limit the rise in spending on health care that pushes up national prices for hospital care and other health services.

Although no one likes to pay more in taxes, it is hard to deny that the existing system of giving large tax benefits to Americans who happen to get health coverage from their employers is unfair to those who pay tax on all of their compensation. Expanding the payroll tax would improve the fairness of the tax system while shrinking the overall budget deficit and strengthening Social Security. It should be part of the tax-reform legislation Congress enacts later this year.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of the Journal’s board of contributors.

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2 replies »

  1. Given the political climate, this otherwise worthy suggestion will go nowhere. The Republicans might try sweetening the medicine by phasing it in over ten years, but the Democrats will win the argument by simply pointing out that this is the biggest middle class tax increase in decades.

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  2. Posted elsewhere on the web:

    “There You Go Again”

    07/21/2017

    It has been 48 years since Neil Armstrong became the first human to walk on the moon. What a great example. We should be “reaching for the stars” in all we do.

    However, we still have so-called economic experts who want to repeat or expand on past mistakes and failures.

    In the July 20, 2017 issue of the Wall Street Journal, in an article by Harvard Professor Martin Feldstein titled: “How to Make the Tax System Fairer and Save Social Security,” Mr. Feldstein recommends: “… If (health) benefits were subject to the payroll tax like all other forms of employee compensation, the government would collect an extra $135 billion this year. … Taxing employer payments for health insurance would create better incentive efforts than increasing personal income-tax rates. Because the tax would be applied to existing benefits, it would not raise marginal rates and therefore it would not reduce the incentive to work or to invest.” As President Ronald Reagan’s Chairman of the Council of Economic Advisors, Professor Feldstein would have never been permitted to propose such a regressive tax change. As President Reagan would say, “there you go again.”

    Simply, he is wrong, especially with regard to its impact on American workers. He complains that the current structure “… is unfair to those who pay tax on all of their compensation.” When he asserts this is some kind of a free lunch because it would not raise marginal rates, he forgets that it would have much the same effect – it would lower worker take home pay from employment by hundreds of dollars a month, and, it would raise employer costs to employ workers by hundreds of dollars a month.

    I mean this sort of tongue in cheek as Harvard clearly has many of the country’s leading economists, but what kind of economics are they teaching at Harvard these days? Instead of extending the same tax preference to the 20+MM Americans covered by individual insurance, he prefers raising taxes on 160MM workers and their employers. And, I wonder if he is sensitive to claims that such payroll taxes are regressive, that they will add to “income inequality,” that they negatively impact middle-class two income earners – since individuals earning in excess of $127,000 a year would pay taxes at only a 1.45% rate on the value of their health coverage while those who earn less than $127,000 in FICA wages would be paying taxes at a 7.65% rate on the value of their health coverage.

    Additionally, this is not the only form of employee compensation that is not subject to payroll taxes. They have yet to apply those employment taxes to the employer contribution to your 401(k) or your defined benefit pension plan. If health coverage contributions (pre-tax cafeteria plan and employer contributions) are now to be counted as wages for FICA and FICA-Med taxes, can employer contributions to your 401(k) and defined benefit pension be far behind?

    They pulled a similar trick with 401(k) plans subjecting pre-tax contributions to FICA and FICA-MED taxes as part of the Social Security Amendments Act of 1983 – where SEC. 324. (a)(1) amended Section 3121 of the Internal Revenue Code of 1954 (relating to definitions) by including as “wages” “… any employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k)).” Making the same change for 401(k) plans didn’t “save” Social Security and Medicare back in 1983… a similar change won’t be any more successful today.

    We need creative ways to reach for the stars and we need to make a giant leap for American Workers retirement.

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