Analysis & Opinions - Wall Street Journal

How to Make the Tax System Fairer and Save Social Security

| July 19, 2017

It's time to expand the payroll tax to include health insurance plans offered by employers.

The U.S. faces two major fiscal problems. Fortunately, there is a simple solution to both that also improves the fairness of the tax system.

The first problem is the size of the overall budget deficit. It is large—2.6% of GDP or $450 billion this year—and will continue to get larger even if tax reform leads to substantially faster economic growth. This is particularly true if Congress increases the defense budget, as it should, to 4% of gross domestic product and if the revenue-raising border adjustment tax is not fully implemented. Large budget deficits reduce investment and growth and hinder a nation’s ability to respond to military and economic crises.

The second fiscal problem is that Social Security is in financial trouble. Current benefits for retirees already exceed the system’s payroll-tax receipts. Benefits are therefore payable under current law only by drawing on the so-called trust fund, an accounting record of previous Social Security surpluses. The Congressional Budget Office estimates that the trust fund’s balance is rapidly declining and will be exhausted by 2030. The amount Social Security pays out every year will then exceed what it takes in by more than $400 billion. The government will face the choice of cutting all individual benefits by about a third, raising the payroll tax by 50% (from 12% to 18%), or using $400 billion a year of income-tax revenue to supplement the payroll-tax funds.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Feldstein, Martin.“How to Make the Tax System Fairer and Save Social Security.” Wall Street Journal, July 19, 2017.