Cuts in Social Security Benefits May Not Harm Younger Workers

Despite the fact that most Social Security reform proposals would result in fewer benefits for future retirees, an offsetting gain would be the decrease in payroll taxes needed from younger workers to support the program. 

According to a study from The National Center for Policy Analysis (NCPA), in some cases, workers would come out ahead with the tax reductions exceeding the Social Security benefit cuts.

The average lifetime single-male income level is calculated in 2011 dollars at $42,886 for a 41-year old and at $51,560 for a 26-year old. The study found that raising a 41-year old middle-income man’s retirement age to 70 would reduce his lifetime benefits by about $60,000. But since his taxes would fall by about $40,000, compared to the taxes necessary to fully fund benefits under the current program, the lower tax burden would offset two-thirds of the benefit loss.

Raising the retirement age for the 41-year old earning a poverty-level wage would reduce his lifetime benefits by about $26,000, but his lower tax burden offsets about 40% of the benefit loss. For a very high-income worker (16 times the poverty level), the lower tax burden would offset 90% of the benefit loss. Changing the benefit formula to make it less generous actually causes the 41-year old middle-income worker’s taxes to drop by more than the loss of benefits. Under progressive price indexing, his lower taxes exceed his benefit loss by $30,000.

Among 26-year olds, raising the retirement age would reduce a very high-income worker’s taxes by more than the reduction in benefits. For a medium-income earner, the tax reduction would make up for 95% of his benefit loss. The fall in taxes for a poverty-level worker would offset about half of his lost benefits. Progressive price indexing would reduce the tax burden for today’s 26-year olds in every income group by more than their benefit loss, when compared to a fully funded current program.

Changing the benefit formula would reduce the taxes of the highest-income earner by more than the reduction in his benefits. The benefit loss of a medium-wage worker would be almost entirely offset by tax reductions. The poverty-level worker's benefit loss would be offset 85% by lower taxes.

“You can't just focus on the change in benefits,” said co-author Andrew J. Rettenmaier, an NCPA Senior Fellow and Executive Associate Director at the Private Enterprise Research Center at Texas A&M University. "You have to compare the taxes necessary to fully fund any reform."

The study also states that raising the taxable maximum would increase the taxes of very high income workers, but for today's 26-year olds half of the tax increase would be offset by increased benefits the government would have to pay to those same workers. 

"The biggest problem with raising the maximum taxable wage is that it commits the government to a larger program," said Rettenmaier.  "Instead of increasing taxes on higher income workers, the progressive price indexing reform lowers their benefits and reduces the program's size. Progressive price indexing produces similar progressivity as does increasing the taxable maximum, but it is more fiscally responsible in the long-run.”

To view the full study, visit