The PWBM analysis to resolve Social Security's cash shortfall tinkered with six variables -- three from the tax side of the equation and three from the benefit side of the aisle. In terms of tax implications, it looked at adjustments to the As for benefit provisions, it examined changes to how COLA is measured, made adjustments to the primary insurance amount, and analyzed changes to the full retirement age.
Social Security debate in the United States - Wikipedia
So, which combination of policy changes worked out best? Interestingly, all six options improved GDP growth over the long run more than the current model. Here's what Option E entails:. What stands out about this optimal fix? Well, don't fall over, but it's bipartisan. What PWBM found out was that tax revenue increases and benefit reduction were both needed to help offset issues that Social Security is contending with. For example, the model notes that tax revenue increases, such as lifting the earnings tax cap, creates an immediate increase in revenue.
However, it also points out that the donut-hole tax, which wasn't included in the "best" option, tends to reduce labor supply and coerce the rich to get creative with their income generation. PWBM notes that some well-to-do persons may defer income realization or derive their income from small businesses to avoid a higher tax rate.
In short, raising taxes works quickly to address the cash flow shortfall, but it tends to produce lower long-term economic growth. Meanwhile, PWBM's newest analysis finds that benefit reductions often move slowly when it comes to addressing the program's cash shortfall, but they do have a positive impact of requiring households to save more for their own retirement.
Opposite to tax increases, benefit cuts tend to provide the highest long-term GDP growth.
Saving Social Security: A Balanced Approach
In other words, the best way to fix Social Security is going to be with a balanced approach that incorporates an increase in taxable revenue, as called for by Democrats, as well as a reduction in long-term benefits, as proposed by Republicans. That protection would evaporate over 28 years, at which time high-wage earners would not only pay the taxes on more money, but at a higher rate.
Combined, the timetable for these tax changes have led some pundits to conclude that millennials will be left to pay the bills left behind by the wave of Boomer retirees. The fact is that the leading edge of that generation will be nearly entering retirement by the time these taxes are fully in place. The kids born today, on the other hand, will be just entering the workforce, and will face the full effect of these taxes over their entire working life.
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If these taxes are such a good idea, why not implement them now, and save our children even a modest portion of these levies? Congress needs to start in the center of the argument, and build consensus around workable solutions. The last attempt at a reform package that combined tax increases and benefit cuts was drafted by a special commission from the Bipartisan Policy Center in , which valued the changes against data from the end of — four years ago.
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Also read: Social Security is losing money by allowing retirees to defer claiming benefits. I am approaching retirement age, and take a keen interest in where it will be in 25 years. It is merely a way that our children will pay for the brokenness.
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Now read: This hybrid Social Security plan could help more people save enough for retirement. Economic Calendar Tax Withholding Calculator. Retirement Planner. Sign Up Log In.
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Opinion: Politicians are being unrealistic about what it will take to save Social Security. By Brenton Smith. Comment icon.