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