Means Testing Social Security Is A Kind of Tax Increase

A blog about business and economics.
Jan. 8 2012 5:12 PM

Means Testing Social Security Is A Kind of Tax Increase

Leaving the payroll tax intact and reducing Social Security benefits for higher-income seniors is, in effect, an increase in marginal tax rates but it was clear from the discussion at this morning's GOP Presidential debate that few Republicans see it this way. Still, it's true. The way Social Security works is that you pay taxes when you're working and you collect benefits when you retire, with the benefits proportional to what you paid. If the benefits were strictly proportional then there would in a sense be no tax at all—it'd be a forced savings program. But the benefits aren't strictly proportional to what you pay. The program has a disability insurance function and is also mildly redistributive. If you make it more redistributive by reducing benefits for people at the top of the income spectrum, this will have all the same effects as making it more redistributive by raising the tax rate paid by people at the top of the income distribution. The proposals are appealing for the same reason—they ask sacrifice of those most able to bear the sacrifice—and they're unappealing for the same reason, reducing incentives to work and invest in human capital.

But for whatever reason, the formal accounting distinction between a "tax increase" and a "benefit cut" seems to weigh very heavily on Republican politicians.

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Still consider a proposal to hand each American a $5,000 cash grant each year financed by a $5,000 per person annual head tax. Implementing this would, in the real world, change nothing at all. But in the exciting universe of accounting it would register as a huge tax increase and a giant expansion of the welfare state. The rank ordering of countries by taxes as share of GDP would need to be revised. But it'd be the same thing.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.