Which is Better for Young Workers: NCPA Study

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Source: NCPA

Workers at all ages could be better off from smaller Social Security benefits rather than higher payroll taxes, according to a new study from the National Center for Policy Analysis (NCPA).

As Congress gears up to debate entitlement spending reform, they must consider the $23.1 trillion Social Security shortfall (in present value) projected by the program’s Trustees.  A plan developed by House Budget Chairman Paul Ryan includes raising the retirement age, reducing benefits, but making the benefit formula more progressive.

The NCPA study considers two ways of reducing future benefits:

  • Changing the benefit formula: beginning for new retirees in 2019, make the benefit formula more progressive above the 40th percentile in the lifetime earnings distribution.
  • Raising the retirement age: once the retirement age reaches 67 in 2027, increase it by one month every two years there after.

Effects of Two Reforms Single Men,
Valued at Age 65 (2013 Dollars)
Reformed Taxes and Benefits less
Baseline Taxes and Benefits
Earnings Level Lifetime Social Security Taxes Lifetime Social Security Benefits Net Change

 

25 Years of Age in 2013

Very Low

-$38,501

-$15,455

$23,046

Medium

-$153,976

-$69,137

$84,838

Taxable Maximum

-$386,278

-$272,718

$113,559

 

 

40 Years of Age in 2013

 

Very Low

-$18,879

-$6,106

$12,773

Medium

-$75,502

-$28,553

$46,949

Taxable Maximum

 

-$182,768

 

-$127,493

 

$55,276

 

Note: The baseline program retains the current benefit formula and is funded by the current statutory tax  plus an immediate  3.3 percentage-point payroll tax increase to make the program solvent for a total tax rate of 13.9 percent. The reformed program includes two provisions: progressive price indexing and future increases in the retirement age and is funded by current statutory taxes less a small decrease. Estimates assume a 2.9 percent real discount rate, present values at age 65, benefit receipt beginning at scheduled or reformed normal retirement ages, and income-adjusted life expectancies. See the text of the study for further discussion.

The study found that current workers benefit from changing the benefit formula and raising the retirement age when compared to the baseline program that retains the current benefits formula but requires an immediate 3.3 percentage point tax increase.

For example, a 40-year-old single male who:

  • Earns very low income, gains in lower taxes over three times as much as he loses in lifetime benefits.
  • Earns a medium income, saves more than 2.5 times as much in taxes as he loses in benefits.
  • Earns at the taxable maximum, pays lower taxes just under 1.5 times the amount he loses in benefits.

For a 25-year-old the results are similar:

  • If he is earning very low income, he gains about 2.5 times as much in lower taxes as he loses in lifetime benefits.
  • If he is earning medium income, he saves just under 2.25 times as much in taxes as he loses in benefits.
  • If he earns the  taxable maximum each year, he pays lower taxes close to 1.4 times the amount he loses in benefits

“If you’re going to take Social Security benefits away from younger people, you need to give them a greater opportunity to put money in a ROTH IRA to replace those benefits,” said NCPA Senior Fellow Pamela Villarreal. “That means changes to current regulations.”

“You can’t just focus on the change in benefits,” said Thomas R. Saving, an NCPA Senior Fellow and Director at PERC. “You have to compare the taxes necessary to fully fund any reform as well as the taxes necessary to fund scheduled benefits.”

With these two reforms, the Social Security program would eventually be 25% smaller than without reform. 

“The biggest problem with making Social Security solvent with the current benefit structure is that it commits the government to a larger program,” said co-author Andrew J.Rettenmaier, an NCPA Senior Fellow and executive Associate Director at the Private Enterprise Research Center (PERC) at Texas A&M University.  

Full study:  http://www.ncpathinktank.org/pdfs/EvaluatingSocialSecurityReformintheAgeofBudgetDeficits-web1-31-2014.pdf

The study is co-authored by Private Enterprise Research Center (PERC) Research Scientist Liqun Liu, and NCPA Senior Fellows Andrew J. Rettenmaier and Thomas R. Saving who are respectively PERC’s executive Associate Director and Director.

The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983. We bring together the best and brightest minds to tackle the country’s most difficult public policy problems — in health care, taxes, retirement, small business, and the environment. Visit our website today for more information.