Arthur E. Young, The Impact of Various Social Security Reform Proposals on Tax Progressivity and Effective Tax Rates.
Unless there are reforms, the Social Security system of the United States will not be able to pay the full amount of benefits promised to workers retiring in the future. The 1994-1996 Advisory Council on Social Security proposed three ways to "save" the system. These were the Maintain Benefits Plan, the Individual Accounts Plan, and the Personal Security Accounts Plan. The Maintain Benefits Plan had both a long- and short-term solution to the Social Security problem. The long-term solution was to raise the payroll tax by 0.8 percent for both employees and employers and has been called the Maintain Benefits Plus Plan in this paper.
This dissertation looks at both the income tax and the Social Security tax together to determine the effects of Social Security reform proposals on the progressivity and effective tax rates of the overall federal tax system. Reform proposals were analyzed by income decile groups, per capita groups, and age groups.
The Panel Study of Income Dynamics (PSID) database was used in this study because it was necessary to know the ages of persons in order to compute their Social Security benefits. The 1990 dataset was used because it was the most recent complete dataset available when this study was begun. The age distribution of the population in 2002 is much the same as it was in 1990, so the results from the study would be expected to also apply to the current population. Included in the sample were 18,244 persons aged 18 and over. The data was "refined" and, in the end, 18,226 persons were retained, which is a retention percentage of 99.90 percent. The PSID database is a weighted database that represents the population of the United States.
Based on the information contained in the sample, each person's income was computed, as was their income tax, social security tax, and present value of future Social Security benefits related to the current year's work (PVSS). The difference between the Social Security tax paid and the PVSS was called the net Social Security tax. For married couples, these numbers were computed as if the couple was married and filing a joint tax return. Once the income and total taxes were computed, the amounts were aggregated into their appropriate groups.
The results of the study indicated that the current system, along with the Maintain Benefits Plan and the Personal Security Accounts Plan, was always more progressive than the Maintain Benefits Plus Plan and the Individual Accounts Plan, although the order of progressivity varied depending on the discount rate used and the type of group that was examined. In some cases, the adoption of a Social Security reform proposal was shown to have large effects on the percent of tax paid by various groups of persons. Social Security reform proposals tended to increase the overall tax burden of the poor, while the rich were hardly affected. A surprising result was that the percent of tax paid was almost the same as the percent of income for all age groups. This was because young persons would tend to pay a high net social security tax and low income tax, while the old would pay a high income tax and low net social security tax.
Social Security reform will continue to be an important issue in our country for a long time. For there to be an equitable and fair reform, it will be very important for Congress to consider how any reform proposal affects various groups of persons.
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|Publication:||Journal of the American Taxation Association|
|Date:||Mar 22, 2004|
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