Deep inside President Obama’s new budget, there’s this fascinating little nugget: Under the White House proposal, the budget actually balances in the year 2055.
But wait, there’s more. While spending would be a couple of percentage points above its post-WWII average by then, revenue would be much higher, some four percentage points, roughly 22% vs. 18%. A record tax burden — with a bullet.
Now, as the Office of Management and Budget puts it: “These projections are not intended to be a prediction of future legislative action, nor are they intended to reflect explicit policy proposals for the years beyond 2023; rather, they are a mechanical extrapolation of the Budget policies.”
I sure hope not. See, one of the changes whose fiscal impact is “mechanically extrapolated” is Obama’s proposal to alter how Social Security benefits are calculated. He wants to base them on the so-called chain weighted CPI index instead of the current CPI. But while this switch would reduce cost-of-living increases and cut Social Security’s future shortfall by 15%, AEI’s Social Security guru, Andrew Biggs, isn’t a fan. He would prefer a chain weighted version of the CPI-E, which measures price changes for individuals over 65.
Biggs also highlights how the switch in the Obama budget would affect the US tax burden:
Currently, most income tax credits and deductions, along with the dollar values attached to different income tax brackets, are indexed to inflation. Using a lower inflation adjustment would reduce the value of credits and deductions and push a greater share of workers’ incomes into the higher tax brackets. Result: higher taxes, and particularly so on low and middle class households. While the Social Security cuts max out at around 3 percent of annual outlays, the income tax increases continue forever. Over the first decade the chained CPI would cut spending by around $130 billion and raise taxes by around $100 billion, but over the second decade and beyond the chained CPI is predominantly a tax increase.
In other words, by lowering adjustments to the tax brackets, chained CPI would gradually make more of Americans’ earnings subject to higher tax rates. Bracket creep returns! Over the next decade, tax revenue would rise by $124 billion. But then it keeps on going. Average tax rates and tax revenues relative to the economy would soon rise to record levels. And as the Tax Policy Center notes, this would also be an ever-expanding middle-class tax hike.
Bottom line: One reason why the Obama budget balances in 2055 — massive tax increases. Biggs also offers a smart portfolio of Social Security reforms:
1. Republicans shouldn’t undercut the President so much as up the ante: propose Social Security reforms that protect the old and the poor but cut costs by reducing benefits for higher-income retirees and improving incentives for saving and longer work lives.
2. For instance, a universal flat benefit could eliminate poverty in old age at half the cost of the current Social Security program.
3. Automatic enrollment in retirement savings accounts could build real saving and investment.
4. Eliminating the payroll tax for older workers could encourage longer work lives, improving retirement security and boosting GDP.
5. Coupling a low initial benefit with COLAs that rise faster than inflation could both discourage early retirement and help the oldest retirees who are in greatest danger of poverty. The chained CPI isn’t the only Social Security reform on the table, and it’s certainly not the best one. Republicans should look further.