Higher Taxes or Lower Benefits?

There’s a debate over whether to save Social Security with higher taxes or lower benefits. Matt Yglesias suggests a mix of the two approaches:

Let’s consider two methods, starting with an all tax approach:

1. Increase the payroll tax by 1%, from 15.3% to 16.3%, and add a $1,000 tax on affluent seniors

Now consider a mix of tax increases and benefit reductions:

2. Increase the payroll tax by 1%, from 15.3% to 16.3%, and cut the Social Security benefits of affluent seniors by $1000.

Do you see the difference?  Neither do I.

Yglesias is essentially proposing that the problem be addressed entirely through higher taxes.  (That doesn’t mean it’s a bad idea, I’m just trying to clarify the issues involved.  And I’d add that Yglesias probably understands this, as he doesn’t claim that it is not an implicit tax increase.)

A useful way to approach government tax and spending issues would be to look at the impact of various proposals on implicit marginal tax rates for both current and future consumption.  Payroll taxes and VATs tax current and future consumption at equal rates.  Taxes on capital income effectively tax future consumption at a higher rate than current consumption.  There may also be different implicit marginal tax rates on low and high levels of consumption (such as “progressivity”).  Poor people often pay relatively low taxes in absolute terms, but face high IMTRs due to a rapid phase out of benefits as they begin to work.

PS.  There are warnings that Social Security might run out of money in 9 years, leading to automatic cuts in benefits:

A Social Security funding crisis could be on the horizon if policymakers fail to take action to protect the program in the next decade, threatening a 23% cut to all 70 million recipients’ annual benefits, a new report claims.

The analysis by U.S. Budget Watch 2024, a project from the public policy organization Committee for a Responsible Federal Budget, predicts that if the primary trust fund used to bankroll Social Security runs out of reserves by 2033, the average newly retired dual-income couple would see an immediate reduction of $17,400. Single-income couples would lose $13,100.

Even though I am currently on Social Security, I would personally benefit if this were to occur.  That’s because the alternative (tax increases and/or steeper benefit cuts for “the rich”, i.e., former thrifty teachers like me), would hurt me more.  To be clear, this outcome is very unlikely to occur, as Congress will almost certainly find some sort of less politically toxic fix to the program.  BTW, “borrowing money” is not an answer, even if the extra debt is never repaid.  That’s because it would require much higher taxes merely to service the additional debt.  One way or another, higher taxes are on the way.  I had this view even before the GOP switched to being a populist big government party.  Now, I’m almost certain.