Pay May Drop Under 2020 Democrats’ Safety Net Plans, Study Says

(Bloomberg) -- Proposals by several Democratic presidential candidates to shore up Social Security by raising payroll taxes could have a downside: lower economic growth and reduced wages, according to a study by the right-leaning Tax Foundation.

Democratic contenders including former Vice President Joe Biden and Senator Bernie Sanders are proposing higher payroll taxes as some voters grow concerned that the Social Security trust fund they’re paying into won’t be there when it’s time for them to retire.

“An increase in the payroll tax rate or the payroll tax base results in lower wages for workers, as payroll taxes are fully borne by labor,” according to the Tax Foundation study released Tuesday. “This results in lower economic growth and lower after-tax incomes, ranging from a drop in economic output from -0.28% for Biden’s proposal to -1.17% for Sanders’.”

The current Social Security payroll tax rate is 12.4%, split between the employee and the employer. The tax is levied onto wages up to $137,700, which would remain in place under the Democrats’ proposals. They would supplement that with some form of additional tax:

• Biden would levy the 12.4% payroll tax on wages above $400,000
• Senator Elizabeth Warren would add a 14.8% tax on wages above $250,000
• Sanders, Senator Amy Klobuchar and former South Bend, Indiana, Mayor Pete Buttigieg have all proposed applying the 12.4% payroll tax to wages above $250,000
• Sanders has also proposed a new 7.5% payroll tax on employers, with an exemption for the first $2 million in wages paid

Michael Bloomberg, who is running for the Democratic nomination for president, hasn’t addressed the Social Security payroll tax in his proposals, and the Tax Foundation study doesn’t mention him. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

The Social Security Administration anticipates the trust fund will be depleted by 2035 if Congress doesn’t make any changes, though benefits would continue to be paid at an 80% rate from incoming taxes. Congress will be under pressure to act before then, though lawmakers generally are less motivated to reach a compromise until deadlines are imminent.

Biden’s plan would raise the least revenue among the proposals -- about $657 billion over a decade -- after accounting for economic effects, according to the Tax Foundation estimates. Sanders’ combined plan would raise the most -- about $4.68 trillion over 10 years. Warren’s plan would raise about $1.57 trillion and the plan backed by Buttigieg, Klobuchar and Sanders would raise $1.3 trillion.

“The proposals to increase the payroll tax rate can raise a decent amount of revenue -- they don’t close the gap for Social Security, but it does put it on a much more sustainable path,” said Garrett Watson, a senior policy analyst at the Tax Foundation. “The trade-off is economic growth over the long term.”

The Social Security tax rate has been 12.4% since 1990. President Donald Trump has floated the idea of cutting payroll taxes to reduce levies on the middle class. His advisers have said they are working on a tax cut plan to be released over the summer. Critics of a payroll tax cut said it could further jeopardize the solvency of Social Security.

Trump’s annual budget released Monday wouldn’t change the Social Security payroll tax.

To contact the reporter on this story: Laura Davison in Washington at ldavison4@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Laurie Asséo, John Harney

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