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As the below table shows, currently the Social Security payroll tax rate for an employed person is 6.20%. Additionally, the employer pays 6.20%. So together, the employer and employee pay 12.40%. Thus, for example, if the employee makes $10,000 in a year, he or she pays $620 in SS payroll taxes and his employer also pays $620 in SS payroll taxes. Together, they pay a total of $1,240 in SS payroll taxes.
A self-employed person pays 12.40%. So if the self-employed person makes $10,000 in a year, he pays $1,240 in payroll taxes.
According to the March 30, 1999 Social Security Trustees report (TR99), payroll taxes need to be increased only by 2.07 percent of payroll in order to keep Social Security solvent for 75 or more years. (This 2.07 percent of payroll figure ignores the $7.8 Trillion that the general taxpayers will have to pay between 2014 and 2034, as discussed in section non72 below.) What this increase would mean is that for a person employed by another, he would pay an additional 1.035 percent of payroll and his employer would pay an additional 1.035 percent of payroll. Thus, after the increase, each would pay 7.235 percent of payroll (6.20 + 1.035 = 7.235).
Together, the employer and emplyee would pay an additional 2.07 percent of payroll. Thus, after the increase, they would pay a combined total of 14.47 percent of payroll (12.40 + 2.07 = 12.47. Or, 7.235 * 2 = 12.47).
A self-employed person would pay an additional 2.07 percent of payroll. Thus, after the increase, he would pay 14.47 percent of payroll.
Social Security Payroll Tax Rates
---------------------------------------------
Employer+
Employer Employee Employee
Share Share Combined Self-Employed
-------- -------- ---------- -------------
Current: 6.20% 6.20% 12.40% 12.40%
Increase: 1.035% 1.035% 2.07% 2.07%
After Increase: 7.235% 7.235% 14.47% 14.47%
The Introduction section non22 already discussed this issue pretty well. But the below is provided by way of review and some additional remarks.
In the case of Social Security, and under the Trustees' Intermediate projection, payroll taxes will have to be increased "soon" by a combined 2.07 percent of payroll (non71) ( an increase of 1.035 percent of payroll each for the employer and employee ). ("Soon" means that we can pay the 2.07 percent beginning now, and close the apparent trust fund financing gap. Or we can delay increasing the payroll tax rate for years, but then the increase will have to be considerably more than 2.07 percent of payroll).
A 2.07 percent of payroll increase doesn't sound too bad. The bigger problem is that the Social Security Trust Fund (SSTF) will need to redeem over $7.8 trillion of Social Security trust fund bonds between 2014 and 2035 in order to pay benefits (See section non86). The general fund will have to come up with the $7.8 trillion to redeem these bonds. The only ways they can realistically do that is to raise income taxes, cut other federal programs, or sell $7.8 trillion of bonds to the public, thus increasing the publicly - held debt. The latter option amounts to a deferred tax increase. (But for a little more perspective, see section non28 where the $7.8 trillion is the equivalent of lump sum $1.5 Trillion in the year 2000, or $108 Billon / year every year for the 34 year period 2000 - 2034).
Also, one must remember to consider the SS deficits after the SSTF is exhausted in 2034. But that is already built into the 2.07% number.
Don't forget that the 2.07 percent - of - payroll increase plus the $108 Billion / year for 34 years only covers the SS program. On top of that will probably be even larger increases to pay for Medicare.
What Table T30.2 in section non30 says is that if we were to finance all of Social Security and Medicare with payroll taxes, and if we were paying the costs of the programs on a strictly pay-as-you-go basis, then payroll taxes would have to be nearly doubled, from 15.85% today to 29.34% in 2040. And to 32.36% in 2070. Below is Table T30.2 repeated for convenience:
Table T30.2 (from section non30) - Repeated
Cost Rates Expressed As % Of Payroll
------------------------------------
Cal. SocSec ------Medicare----- SocSec+
Year (OASDI) HI SMI Total Medicare
1999 10.80 3.10 1.95 5.05 15.85 %
2040 18.18 5.79 5.37 11.16 29.34 %
2050 18.28 6.06 5.32 11.38 29.66 %
2070 19.63 6.78 5.95 12.73 32.36 %
That sounds horrific. On the other hand, even the "dismal" Trustees' Intermediate Forecast projects that real wages and real GDP per capita will grow. The Trustees forecast a bit over a 0.9%/year increase in real wages from 1999 out to 2075 (See Table II.D1 in TR99). (I've used 0.9% to be slightly more pessimistic).
Therefore, as shown below, even with higher taxes, real take-home pay will increase. And thus living standards will increase. In that sense (and given that the Trustees' Intermediate forecast or better occurs), senior entitlements are not a problem. The next section shows that given the Intermediate projection and payroll tax rates equal to the cost rates in Table T30.2 of section non30, the average worker enjoys a real increase in take-home pay of 26% between 1999 and 2040, and another 27% between 2040 and 2070. And that's assuming that the employee absorbs all of the increase in the payroll taxes (instead of the employer and employee each paying half the increase).
In the following, I'll assume that the "market value" of the average employee to employers, due to the average employee's productivity, goes up at a rate of 0.9% / year. (This is a more pessimistic assumption than assuming that the employee's real gross pay goes up by 0.9% / year, which is why I use it -- even with the more pessimistic assumption, I can show that the employee's final real take - home pay increases. In the below, the employer pays no more in pay plus payroll taxes combined than the "value" of the average employee. Thus, the employer does not "eat" any of the increase in the payroll tax, but rather in effect passes it on to the employee in terms of pay that is lower than it would be without the payroll tax increase).
Imagine that the productivity of the average employee in some industry in 1999 is $32,377. Thus the "value" of the employee to the employer is $32,377. (I'm neglecting other taxes and fringe benefits, and other employee costs in this example). Also, assume that the payroll rate is the same as the cost rate for SS and Medicare, including Medicare Part B (SMI) (see Table T30.2 above), i.e. 15.85%, split evenly between the employer and employee (7.925% each). Thus the employer can afford to pay the employee $30,000, and to pay payroll taxes of $2,377 (7.925% of $30,000 = $2,377). Putting it all together, the pay and tax situation of this average employee in 1999 is as follows:
$32,377 "Value" of employee to employer.
2,377 Employer payroll tax: 30,000 * 7.925%
30,000 Pay
2,377 Employee payroll tax: 30,000 * 7.925%
27,623 Employee's take home pay
Assuming that the value of the average worker increases by 0.9% / year, the value of the average worker in 2040 will be $32,377 * 1.009^41 = $46,749. (1.009^41 is 1.009 raised to the 41st power). And in 2070, the value of the average worker will be $32,377 * 1.009^71 = $61,166. Corresponding pay and taxes are shown below:
==========================================================
Table T75.1: Payroll Tax Rates Assuming They
Are the Same as the Projected Cost Rates of
The SS and Medicare Programs, Including The SMI Program
=======================================================
Combined Tax Rate Employer Employee
Year (Employer + Employee) Tax Rate Tax Rate
---- --------------------- --------- ---------
1999 15.85 % 7.925% 7.925%
2040 29.34 % 14.670% 14.670%
2070 32.36 % 16.180% 16.180%
Table T75.2: Pay and Taxes, in 1999 Constant Dollars
========================================================
Employer and Employer and Value
Employee Payroll Employee Payroll Of
Year Pay Tax Rate (each) Tax (each) Employee
---- ------ --------------- --------------- --------
1999 $30,000 7.925% $2,377 $32,377
2040 $40,768 14.670% $5,981 $46,749
2070 $52,648 16.180% $8,518 $61,166
In above, Payroll Tax = Tax Rate * Pay
and, Pay + Payroll Tax = Value Of Employee
Table T75.3: Value Of Employee, Pay, and Take Home Pay
In Constant 1999 Dollars
==========================================================
Value Take-
of % inc- % inc- Home % inc-
Year Employee rease Pay rease Pay rease
---- -------- ------ ------- ------ ------ -----
1999 $32,377 $30,000 $27,623
44% 36% 26%
2040 $46,749 $40,768 $34,787
31% 29% 27%
2070 $61,166 $52,648 $44,131
Check: Value_of_employee/(1 + payroll_tax_rate) = pay
32377/1.07925=30000 46749/1.1467=40768 61166/1.1618=52648
The above scenario in effect assumes that the employer does not "eat" the increase in his/her share of the payroll tax rate, but rather passes it on to the employee in the form of relatively lower pay. Even under this pessimistic assumption, the average worker enjoys a real increase in take home pay of 26% between 1999 and 2040, and another 27% between 2040 and 2070.
See also section non76 on the subject "Real GDP After Taxes Will Increase".
For a discussion of whether the SS Trustees may be too optimistic or pessimistic, see section non234.
For the view that the economic situation for most people has been declining (and so perhaps will continue to decline or at least not improve at the rate of 0.9 % / year), see section non36.
YET TO BE DONE
For a discussion of whether the OASDI (Social Security) Trustees may be too optimisitic or pessimistic, see section non234.
For the view that the economic situation for most people has been declining (and so perhaps will continue to decline), see section non36.
As explained in section non59, currently, and for the last 15 or more years, the income of the SS system (Social Security taxes collected plus interest earned on the Social Security Trust Fund) exceeded its outgo (payments to beneficiaries and administrative costs). The difference between the SS annual income and SS annual outgo is known as the annual SS surplus. The SS system loans the annual SS surplus to the Treasury general fund, in exchange for special non-marketable interest-bearing securities, which are referred to at this web site as Special Interest Treasury obligations, or SIT obligations. (The general fund promptly spends the loaned money on current non-pension federal programs). The SS administrators put these SIT obligations into the Social Security Trust Fund (SSTF). Thus, the SSTF has been building up considerable assets. At the end of 1998, for example the SSTF had $763 Billion in assets, virtually all in the form of SIT obligations.
However, as the baby boom generation begins to retire, the annual Social Security surpluses will begin to dwindle, and then turn into annual Social Security deficits. Per the Trustees' Intermediate projections, these deficits will grow to huge magnitudes, reaching over $1100 Billion per year in 2040 and nearly $6400 Billion per year in 2075. (All numbers in this section for years after 1998 are from the Intermediate Projections of the March 1999 Social Security Trustees, Report, TR99).
Table T80.1 below shows the past and projected future operation of the SSTF (remember that what I call the SSTF is actually the combination of the OASI trust fund and the DI trust fund).
I need to explain the column headings of the below Table T80.1 clearly, particularly with regard to Operating (Cash) Income and Interest Income.
It is important to understand that the SSTF is a Treasury Department account. (Actually, to be more precise, the SSTF consists of two accounts - the OASI trust fund and the DI trust fund, which are both Treasury Department accounts). Also, the general fund of the Treasury is a Treasury Department account. (Actually, the general fund of the Treasury is made up of multiple accounts, so that is why the term "general fund" in "general fund of the Treasury" and "Treasury general fund" is not capitalized in federal government literature or here).
With the exception of interest income, all income that the SSTF receives is from sources outside of the federal government. Income that the SSTF receives from sources outside the federal government is real money income -- practically all of it is from Social Security taxes.
Interest income that the SSTF earns, however, is an internal (i.e. within the federal government) transfer of funds -- from the Treasury general fund to the SSTF. Thus, while this interest income increases the SSTF's account balance, it decreases the general fund's account balance by the same amount. From the viewpoint of the federal government as a whole, this interest income is just an internal transfer, and thus does not enhance the federal government's assets or ability to pay benefits in the future. (See section non102 for more on the nature of the trust fund interest).
Below is an explanation of the column headings of Table T80.1. All of the below column headings refer to income that the SSTF receives in one form or another, and to expenditures by the SSTF.
Operating (Cash) Income (excludes interest) = income (related to SS) that the federal government receives from sources outside the federal government. It is practically all from Social Security taxes. It does NOT include Interest Income, because that comes from within the federal government. (Namely from the Treasury's general fund). What I (and the Concord Coalition) call "Operating (Cash) Income" is what the SS Trustees calls "Income Excluding Interest" in Tables III.B3 and Table III.B4 of the March 1999 SS Trustees Report (TR99).
The "(Cash)" in "Operating (Cash) Income" merely stresses that this is "real money" income received from sources outside of the federal government. In contrast, interest income is just a book-keeping internal transfer from one account of the federal government to another account of the federal government.
Outgo = money (related to SS) being paid by the federal government to entities outside the federal government -- namely to Social Security beneficiaries and SS administrative expenses.
Operating (Cash) Net Income = Operating (Cash) Income minus Outgo. It is the difference between all Social Security - related money coming into the federal government and all Social Security - related money leaving the federal government. Note that it does NOT include any Interest Income because that is an internal transaction. It is the same as the OASDI (SS) "Balance" in Table III.B4 of TR99, and what the Concord Coalition calls "Operating (Cash) Balance".
Interest Income = interest paid by the Treasury general fund to the SSTF. It is a transfer of assets (in the form of SIT obligations) from one account of the Treasury to another account of the Treasury (actually from the Treasury general fund to the OASI and DI trust funds, which are also administered by the Treasury). So it is actually a transfer from one fund of the Treasury to two other funds of the Treasury. Since it is an internal transfer of assets, I do not include it in the Operating (Cash) Income and Operating (Cash) Net Income figures.
Income = Operating (Cash) Income + Interest Income. This is the total income that the SSTF receives. The Operating (Cash) Income comes from sources outside the federal government. The Interest Income comes from within the federal government. (To keep the below table from being too complicated, I don't have a column for this in the below table).
Net Income = Operating (Cash) Net Income plus Interest Income. It is total income received by the SSTF (including interest) minus outgo. I also refer to it elsewhere as the "Annual Surplus" of the SSTF.
SSTF Assets At End Of Year = Total assets in the SSTF at the end of the year. Almost entirely in the form of "Special Issue Treasury obligations".
Federal Government Assets (related to SS) At End Of Year = 0. Recall that the SSTF loans all of its annual surpluses to the general fund, in exchange for SIT obligations. And that the general fund promptly spends this money on current general federal programs. Thus, all SSTF assets are general fund liabilities, and so, on net, do not represent an asset to the federal government overall. The SIT obligations in the SSTF are merely an accounting device keeping track of what the Treasury general fund owes to the SSTF. I do not show a column for Federal Government Assets (related to SS) in the below table, since the entire column would be zero.
And finally, the table.
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