What this means is that long before the trust fund is exhausted, income taxes will have to rise by an amount equal to difference between current Social Security revenues and benefits. In other words, income taxes will have to go up by about 2.5 percent of GDP between now and the date the trust fund is exhausted in order to redeem the bonds it holds, which will be cashed-in to pay benefits over and above Social Security taxes.
But on the date the trust fund is exhausted, taxpayers will have paid off their debt to the trust fund. Thus, income taxes could theoretically fall by 1.7 percent of GDP on that day. If the payroll tax had to rise by the same amount, most taxpayers would be unaffected. Their income taxes would go down by exactly the same amount that their payroll taxes went up. More likely, Congress would simply authorize general revenue financing for Social Security, which is what happens when the trust fund is drawn down anyway. In short, absolutely nothing would change in terms of either taxes or benefits on the day the trust fund is exhausted.
What this means is that there is no apocalypse in 2042 in which anyone's benefits will suddenly be cut or their taxes sharply raised. The implicit tax increase will take place gradually long before that date, and Congress will never allow benefits to be cut that way. It would only take a matter of hours for it to authorize general revenue financing should there be no changes to the Social Security program over the next 37 years.
Still, it is highly undesirable to raise taxes by the equivalent of 2.5 percent of GDP over the next several decades to pay Social Security benefits. That would be equivalent to raising income taxes by 34 percent this year. This is the real reason to reform Social Security, not because of looming bankruptcy, which will never be allowed to happen.
It may be politically useful to use apocalyptic rhetoric to sell a controversial Social Security reform plan. But the real reason to do it is to prevent a massive income tax increase, not because anyone's benefits are threatened by inaction.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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