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Bernie Sanders and Hillary Clinton have squared off in what progressive author James W. Russell recently called “the Democratic Party’s increasingly central debate over expansion of Social Security.” Challenged by Mr. Sanders to join him in promising “never to cut Social Security,” Mrs. Clinton tweeted a response: “I won’t cut Social Security. As always, I’ll defend it, & I’ll expand it. Enough false innuendos.” Nevertheless, the reforms they propose would change the program in fundamental but different ways.
Both candidates want massive tax increases, but not by increasing the payroll tax rate, the traditional means for buttressing Social Security finances. Instead, they would put all the financial burden on high-income earners. Mr. Sanders would eliminate, over 17 years, the $118,500 ceiling on which payroll taxes are levied. He also would immediately apply a 6.2% tax on investment income to households with incomes above $250,000. Mrs. Clinton is more circumspect but has recently spoken in favor of both approaches.
The maximum earnings subject to the payroll tax would be raised, but—and this is significant—without increasing the benefits eventually paid out to those who pay more in. Moreover, for the first time, non-wage income would be taxed.
What sets Mrs. Clinton and Mr. Sanders apart is how they increase benefits. Mrs. Clinton would raise retirement payments for widows as well as provide Social Security credits for individuals who take time out of the workforce to care for a child or an infirm adult. Mr. Sanders would increase the basic benefit for most retirees, raise cost-of-living adjustments, and institute a new minimum benefit for long-career low earners. Overall, Mr. Sanders’s proposed benefit increases are nearly three times as large as Mrs. Clinton’s.
But Mrs. Clinton’s benefit increases are more “progressive.” I analyzed both proposals using the Policy Simulation Group’s microsimulation models, which are used by the Social Security Administration, Government Accountability Office and Labor Department. Under Mrs. Clinton’s plan, about 57% of the total dollar increase in benefits would flow to the bottom two-fifths of households, with 21% received by the top two quintiles of households. Under Mr. Sanders’s plan, 35% of total benefit increases flow to the bottom two-fifths of households while 44% go to the top two-fifths.
These differences derive from the not-entirely-progressive provisions of Mr. Sanders’s benefit increases. For instance, Social Security currently replaces 90% of an individual’s first $10,272 in average pre-retirement earnings, with lower replacement rates for earnings above that level. Mr. Sanders raises the annual earnings covered by that 90% replacement rate to about $11,800. This boosts benefits progressively for individuals with earnings above $10,272, but individuals with earnings below $10,272 receive no benefit increase. Mr. Sanders also institutes a minimum benefit of 125% of the poverty threshold for workers with 30 years of earnings, but those with shorter careers—who are usually poorer—receive less. Higher cost-of-living adjustments also tend to benefit wealthier, longer-lived retirees.
Despite increased taxes, neither proposal would shore up Social Security’s long-term funding deficits. These currently range from $10 trillion to $15 trillion over the next 75 years, according to various government estimates.
The Sanders plan, according to Social Security Administration actuaries, would close about 82% of the program’s long-term deficit as scored by the Social Security’s Trustees. But it would fix only about half of the larger shortfall as projected by the Congressional Budget Office.
Mrs. Clinton’s more restrained benefit increases would probably let her approach 75-year solvency under the assumptions made by the Social Security Trustees, but still fall well short of addressing larger projected shortfalls estimated by the CBO, or by a recent Technical Panel appointed by the bipartisan Social Security Advisory Board. In any event, both presidential contenders would raise the effective top marginal tax rate by 12 percentage points.
SSA actuaries assume that upper-income individuals would not work less in response to higher payroll taxes—but the SSA and the CBO do assume that if employers must pay 6.2% tax on their employees’ earnings above $118,500, they will reduce employee wages to cover the extra costs. Those lost employee earnings would no longer be subject to federal income taxes, state income taxes, or Medicare payroll taxes. In short, while Social Security might gain $2.4 trillion over 10 years, the rest of the budget would lose nearly half a trillion dollars in revenues over that time.
It’s unclear how popular either proposal would be in the general election. Americans don’t want Scandinavian levels of taxation and certainly not, in Mr. Sanders’s case, to pay higher benefits to mostly higher-income households.
A well-designed but fiscally conservative Social Security reform could compete with either plan. For instance, a flat poverty-level retirement benefit paid to all, coupled with expanded access to 401(k)s, could eliminate poverty in old age, increase retirement saving, and make Social Security solvent at almost one-third lower cost than Mr. Sanders’s plan, eliminating the 12.4% payroll tax on retirees who continue to work.
Mr. Biggs is a resident scholar at the American Enterprise Institute. In 2008-09 he served as principal deputy commissioner of the Social Security Administration.
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