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A Social Security Collision

Jun 20, 2011 • Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 183 Views    No Comments

Ask a 56-year old and a 26-year old about Social Security and you will probably get very different answers. 

In the NY Times, an unemployed 56 year old woman said: “My investments took a bath, then being out of work for a few years–I’m sorry but there’s not that much left. I’m going to need Social Security and Medicare.” However, in order to get the amount of Social Security she expects, a 26 year old could expect to pay a higher payroll tax.

When? In 2030, she will be 75 and the 26 year old will be 45.

Almost doubling since 1990, the number of retirees is surging. However, the number of taxpayers is up by much less. As a result, by 2036, Social Security will be unable to fulfill its promised obligations. The “old” worry about their benefits. Because Social Security is “pay-as-you-go,” the “young” are concerned about paying for them. The NY Times called it “Between Young and Old, a Political Collision.”

The Economic Lesson

Cut benefits? These are several approaches:

  • Reduce what upper income earners would receive.
  • Increase the retirement age.
  • Reduce cost-of-living increases in benefits.

Increase Taxes? These are possibilities:

  • Tax all that people earn instead of the cap on taxable income that now exists.
  • Select a much higher cap on taxable income than now exists.
  • Increase the payroll tax rate from 12.4% to 14.4%.

Or, just wait and see if economic growth solves the problem?

Using this interactive WSJ graphic, you can see the impact of different policy alternatives.

An Economic Question: If Republicans reject tax increases and Democrats refuse to cut benefits, how would you get the Congress to act?

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