The debate over Jeb Bush’s new tax plan is mostly concerned over whether it disproportionately benefits the wealthy and adds to the deficit, but in the process, analysts have overlooked his most interesting proposal.
Though it’s true that broader effects are important, the reality is that should Bush (who is second in the Washington Examiner‘s presidential power rankings) become president, any actual tax reform would be the subject of long debate in Congress and details are likely to change. Campaign proposals, thus, are often more interesting for the introduction of new ideas.
Though many aspects of Bush’s plan to simplify the code and reduce marginal income tax rates have been seen before, one fresh and intriguing idea is the proposal to scrap the employee’s 6.2 percent portion of the Social Security payroll tax for workers who remain in the labor force after age 67.
Bush, in announcing the plan on Wednesday, said the idea would ease the burden on “seniors who have already sent enough of their paychecks into the system.” The thinking from his campaign is that this change would remove a disincentive to continue working that’s created by current policy, and thus boost labor force participation among seniors.
The proposal follows work that has been done on the subject by Andrew Biggs, a scholar at the American Enterprise Institute and former deputy commissioner at the Social Security Administration.
“We want people to work longer,” Biggs explained in an interview with the Washington Examiner. “Extending your work life is a really effective way of raising your retirement income, because you have more time to save, to build up your 401k. You also have fewer years of retirement that your savings have to cover … The problem is the Social Security benefit formula doesn’t really reward people who delay retirement.”
The issue is that Social Security benefits are calculated using a formula that’s based on a worker’s highest 35 years of earnings. Once somebody has already passed the retirement age, a few extra years in the workforce won’t significantly change their lifetime Social Security benefits. But if they continue to work, they’ll still have to pay payroll taxes.
Biggs, in the past, proposed a bit more aggressive of an approach to address this issue. He would have ended both the employee and employer portion of the payroll tax — the full 12.4 percent — and done so earlier, once somebody reached 62. A study that Biggs co-authored in 2009 while still at the Social Security Administration found that for every dollar in additional payroll tax that a worker nearing retirement pays, he or she only receives about 2.5 cents in extra benefits.
Furthermore, other economic research has shown that seniors are especially sensitive to changes in taxes. As Biggs notes, whereas somebody in their 40s with a mortgage and mouths to feed will have to keep working even if tax rates changed, somebody who is already at or near retirement age is more likely to call it quits in response to such changes.
Fiscally, Bush’s proposal would have a number of offsetting effects.
On the one hand, slashing the payroll tax would reduce tax collections among people who would have worked past 67 anyway. On the other hand, for those who otherwise would have retired but now decide to continue working, those workers would now be paying income taxes, Medicare taxes, state and local taxes, and their employers would still be paying their share of payroll taxes.
Biggs’ work has suggested that if all effects were taken together, the idea would pay for itself if state and local tax collections are included, and mostly pay for itself if only federal tax collections are included. He argues that it is unlikely that it would substantially change the finances of the Social Security system.
In addition to the revenue effects, adding more individuals to the workforce would boost economic growth.
Though this proposal is no substitute for broader reform to the Social Security system, it’s an idea worth exploring further, regardless of what comes of Bush’s presidential candidacy.
This article appears in the Sept. 14 edition of the Washington Examiner magazine.
