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one of the ideas that President Trump
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has talked about recently is the
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possibility of removing the paying of
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taxes on Social Security benefits but
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new research by the pen Warton budget
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model shows why the concept may have
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some issues pleasure to be joined here
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in Studio by Ken SMS who's faculty
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director of the pen Warton budget model
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great to see you again good to be here
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all right so let's dig into the research
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and some of the concerns that may be out
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there from going down a path of removing
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taxes right I mean it's certainly a
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popular idea whenever you tell people
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they can keep more of their money but
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ultimately someone has to pay for it and
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right now the idea is not really funded
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anyway there's no pay for for it so what
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we estimate is that it would uh
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basically reduce uh federal tax revenue
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by about 1.5 trillion over 10 years and
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it would increase federal debt therefore
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quite a bit over 30 years by uh about 7%
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and furthermore uh that tax revenue
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actually gets dep positive into the
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Social Security trust fund under current
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law and so we estimate the trust fund
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currently is is going to deplete in 2034
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and that would get uh pushed up now to
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2032 right and and I guess when you're
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talking about the removal of those taxes
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the money that would be there if you're
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looking at at who get Social Security
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benefits the people who get more
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benefits to begin with would see a
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greater impact uh on their on their
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bottom line here that's right and the
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way it works is kind of convoluted in
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that is not all benefits get taxed it
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actually depends on how much benefits
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you get ass summed with your other
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nonsocial security income during
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retirement and only if that total income
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goes above a certain threshold um that
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that's a fraction of your Social
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Security benefits get taxed and so it is
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um the case that those income tax
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brackets are still the same the normal
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income tax brackets those get indexed
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for inflation over time but the
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qualification of whether or not your
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benefits get taxed they don't get
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indexed for inflation that was part of
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the trickery behind all of this but
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nonetheless it raises tremendous amount
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of tax revenue and and so the rural
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beneficiaries of this given that lower
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and middle income class people are often
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not paying these taxes to begin with the
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real beneficiaries tend to be higher
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income there are a lot of areas which I
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found interesting to to kind of delve
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into one of which that you bring up is
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the potential impact around the
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incentives to save and also to work as
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well right um this is not just your
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normal debt where you know yes 1.5
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trillion over 10 10 years at one time
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that would be like huge number now you
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know uh people talk about two three four
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trillion dos over 10 years but it it's
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this type of debt not only reduces uh
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Capital formation but there's kind of an
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additional effect and that is if um I
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know I'm going to get larger benefits in
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retirement I don't have to save as much
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myself for a retirement and they I also
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don't necessarily have to work as long
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um and things like that so there's
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macroeconomic effects that go beyond
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just a normal debt story you talk about
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a moment ago in kind of a tenure window
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but you also look at this from a 30-year
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perspective as well and the impacts
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would play out over that period also
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that's right and so one of the problems
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with a lot of uh what we call Budget
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scoring in Washington DC is that it
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looks at the 10e window and there's all
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sorts of games that can be played with
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that when we talk about entitlement
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programs uh we usually want to look out
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further in time but on top of that um
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you know all fiscal policy should be
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looking Beyond 10 years but especially
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in the case of Social Security Medicare
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and programs like that we should be
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looking Beyond and what this will do is
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uh certainly uh produce more and more
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debt over time uh decrease people's
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incentive to save into work and so we're
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estimating within 30 years uh this this
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just this provision alone will reduce
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the size of the economy by about 2% uh
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that is GDP will fall by about 2%
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relative to where otherwise would have
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been in 30 years so as fiscal policies
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go it's it's a pretty big loss safe to
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say then when you're looking at that
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30-year window that the impacts on
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people who may already be or close to
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being in that category of accepting
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Social Security benefits now would see a
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much different impact than somebody who
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would see those benefits say in 2054
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that's right so when we think about who
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are kind of the winners uh uh today um
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there's definitely anybody who's close
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to retirement um or within retirement uh
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they're definitely going to be a winner
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here because uh they uh already saved
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their money they did most of their labor
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Supply um and all of a sudden they just
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get this tax break I mean and there's no
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real incentive effects for them in terms
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of working more saving harder or things
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like that in fact the incentives are
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again just the slightly the opposite but
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for the most part not too much incentive
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effects for them it's really the future
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generations and so what we calculate
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even though there's a lot of winners
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today anybody who is Young today um it
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doesn't matter if they're high income
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Med medium income or even low income
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low-income households would even be
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worse off under this and the reason why
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is that a lot of those low-income
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households would not have paid social
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security benefit taxes to begin with uh
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because their income is going to be too
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low but they're going they're going to
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suffer from the macroeconomic
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consequences in terms of lower wages
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simply because you're going to have less
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Capital that's built up in the economy a
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smaller economy and lower w wages and so
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it's that lower wage effect that's is is
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really going to be dominating uh for
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them so this is this is really kind of a
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trickle down effect uh to the entire
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income distribution you also mentioned
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in the research that there would also be
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obviously a negative impact around GDP
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as well yeah so we estimate that uh GDP
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uh the size of the economy essentially
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will be about 2% lower than what
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otherwise would have been 30 years uh
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average wages will be about 1.8% lower
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Capital key ation over 4% lower um and
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so I yes some of the this is driven by
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the higher debt uh about 7% higher in 30
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years but a lot of this is not just the
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debt but it's the fact that households
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now have less incentive to save for
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retirement uh and they work as long uh
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during their during their pre-retirement
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years and that would kind of lead to I
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would think kind of an uneven
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distribution of the benefits because of
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how much you're paying into it and how
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much people in the next 30 years would
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be paying into it as well that's right
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so certainly for younger people uh today
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it is true that the um some uh let's
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think about middle income class person
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who's just kind of entering the
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workforce uh uh today they're going to
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we estimate that they're going to lose
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about $10,000 in terms of uh uh total
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kind of value um over their their
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lifetime someone who's born you know 20
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years from now they're going to lose
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even more more around
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$22,000 that's kind of for a middle
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income class person a lower income class
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person or lower uh the lowest income
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class they're still going to lose
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between 10 to
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$1,000 in the future it is true some
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higher income uh class people you think
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would benefit because they have lower
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benefit taxes but they're going to lose
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um potentially yes they don't they
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actually lose a little less than the
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middle uh uh income class because they
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benefit some from this tax reduction um
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but they also still hurt uh get hurt
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overall if they're younger is just from
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the uh the lower wages and so that we
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estimate they're going to lose about
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$155,000 the importance of this also is
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partly because of the discussion we've
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been having in recent years about social
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security about the trust fund and trying
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to make sure that you have this as a
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component moving forward maybe this is
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part of the reason why the Trump
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Administration is is talking about this
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but still it becomes an ever important
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conversation that we're going to
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continue to have in the years ahead yeah
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and but the way that Trump
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Administration is talking about this if
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we're going to not tax Social Security
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benefits is it's going in the opposite
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direction of trying to create solvency
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in Social Security it's actually taking
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money away from uh the social security
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system and so it's going to hasten the
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trust fund depletion date by about two
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years so in 2032 we're only talking
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about seven eight years from now um we
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were talking about uh uh the trust fund
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depletes now that point it's not true
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that benefits just go to zero but
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benefits will drop by about a quarter so
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uh you're going to get paid about 75
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cents on the dollar that you were owed
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and the downstream impact then for
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retirees they have to probably in many
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cases live much different Lifestyles
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than maybe they thought they would have
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because of that cut that's right and so
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it's not necessarily they can make up
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all that saving today and um maybe they
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can delay their retirement a little bit
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but that's going to be you know another
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life style uh a change that they maybe
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were not expecting and so uh they're
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going to have to definitely make some
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changes now people say well you know
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Congress will figure this out well we're
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already on this explosive debt path
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without this change Congress hasn't
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figured that out the White House hasn't
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figured that out and so um you know this
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is moves us even one more step in in the
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opposite direction in terms of uh Shing
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up the nation's uh solvency K great to
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see you again thanks very much great to
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be here thanks for having me thank you
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Kent SMS who is faculty director of the
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pen Warton budget model
