IB#9-16

Introduction

It’s no secret that Social Security is facing a long-term financing shortfall.  This problem can be solved only by putting more money into the system and/or by cutting benefits.  There is no silver bullet.  So the following discussion is not to suggest that there is an easy way out, but rather to explore whether the entire financing of the Social Security system should rest on the payroll tax.  The payroll tax may be a perfectly reasonable way for current workers to pay for their benefits.  But is it the right tax to finance the costs left over from paying benefits far in excess of contributions to early generations?  

This brief explores the question of the appropriate tax, or combination of taxes, to finance Social Security.  Since the need for more revenues gives the question increased currency, the first section briefly describes Social Security’s financial outlook.  The second section then describes the payroll tax.  The third section explores whether the whole cost of the Social Security system – the contributions necessary to generate current benefits and the contributions required to make up for giving early participants benefits far in excess of their contributions – should be financed in the same way.  The fourth section concludes that perhaps a portion of Social Security financing could be transferred from the payroll tax to the income tax.  It would mean higher income taxes, but the burden of the “legacy debt” would be borne more broadly.  

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