April 16, 2015
Like many other folks connected with the Washington Post, columnist Charles Lane wants to cut Social Security. He used his column today to argue that New Jersey governor Chris Christie and Massachusetts senator Elizabeth Warren want to address the shortfall in Social Security in essentially the same way, but progressives are too dumb to recognize this fact.
“The irony is that the progressive plan and Christie’s plan are equivalent, at least in their very broad financial strokes. Both claim to match Social Security resources and obligations over time, and to accomplish this progressively; that is, with upper-income folks bearing a relatively higher share of the adjustment costs.”
While Lane may see Christie’s proposal to means-test Social Security benefits as being essentially the same as Warren’s plan to eliminate the cap on wage income subject to the Social Security tax, the numbers indicate otherwise. Christie has said that he would means-test benefits on people with income above $80,000 with the idea of phasing out all benefits for people with incomes over $200,000. If we assume that these people have benefits of roughly $30,000 a year (this is a bit less than the average benefit projected for a high income earner in 2025), this means that we would be phasing out $30,000 in benefits over an income span of $120,000 (the difference between the $200,000 end point and the $80,000 start point). That is equivalent to a 25 percentage point increase in the marginal tax rate for retirees whose income falls within this band.
Under the Christie plan, retirees with incomes above $200,000 would see no further cuts than those with incomes of $200,000 since they will have already lost all of their Social Security. This means that those with income of $2 million or even $20 million would face the same income loss as those with income of $200,000. Of course his plan also does not affect at all people who are still working and not collecting Social Security.
There is also the issue of taking away a benefit that workers have paid for. After all, we could means-test interest payments on government bonds, but that apparently does not bother either Christie or Lane. In addition, we are likely to see substantial distortions as upper income retirees find ways to hide income (e.g. buy a condo for winter vacations rather than use investment income to pay for a hotel). But such distortions apparently do not matter to Lane and Christie, even though they are likely to substantially reduce the savings from means-testing.
By contrast, the Warren proposal would tax people during their working careers. It would not be limited, so people who earned more would be paying more. Here’s how the two compare:
| Loss of Income | Loss of Income | |
| Christie Plan | Warren Plan | |
| Retiree with $90,000 annual income | $2,500 | $0 |
| Retiree with $100,000 annual income | $5,000 | $0 |
| Retiree with $120,000 annual income | $7,500 | $0 |
| Retiree with $200,000 annual income | $30,000 | $0 |
| Retiree with $2,000,000 annual income | $30,000 | $0 |
| Worker with $90,000 annual income | $0 | $0 |
| Worker with $120,000 annual income | $0 | $186 |
| Worker with $200,000 annual income | $0 | $10,106 |
| Worker with $1,000,000 annual income | $0 | $109,306 |
| Worker with $20,000,000 annual income | $0 | $2,465,306 |
To take a few notable examples, under the Christie plan, a retiree with an income of $90,000 would see a loss of benefits of $2,500 a year. This retiree would lose no benefits under the Warren plan. A retiree with an income of $120,000 would see a $7,500 loss of benefits under the Christie plan. Their benefits would not change in the Warren plan. At $200,000 the benefit loss would be $30,000 under the Christie plan, compared with zero under Warren’s plan. Even very rich retirees would only see the same $30,000 loss in benefits and of course rich people who are not yet retired would lose nothing.
By contrast, under the Warren plan middle income wage earners would see little or no impact. A person earning $120,000 a year, just over the current $118,500 cap, would pay an additional $186 a year in taxes. This would rise to $10,100 in additional payment for a worker earning $200,000 a year. For a worker earning $1,000,000 a year (think of a successful medical specialist), the additional payments would be $109,300 a year. For a highly paid CEO or a fund manager (think of Mitt Romney) earning $20,000,000 a year the hit would be $2,465,300.
To those not affiliated with the Washington Post or the Christie campaign these impacts may not seem that similar.
There is another point worth noting about Lane’s column. While he is concerned about the need for reducing budget deficits, the economy’s main problem for the last six years has been deficits that are too small. Additional spending would have led to more growth and more jobs. This may change in the future, but there is certainly no guarantee that it will. And the people who have been raising concerns about deficits have a great track record of being tremendously wrong about the economy. This might be a good place to look to affect policy for those fixated on the problem of budget deficits.
It is also worth noting that our deficits will be in part a function of the Fed’s actions. If the Fed maintains lower interest rates and allows the unemployment rate to continue to fall it can easily reduce the government deficit by more than $2 trillion over the next decade as a result of interest rate savings and more tax collections. And, more employment will mean stronger wage growth for those at the middle and bottom of the wage distribution.
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