Payroll Taxes May Have to Go Up

September 20, 2013

According to the CBO, benefits are projected to continue to grow for Medicare and Social Security and that means higher payroll taxes.

The CBO’s long term projections show that “[f]ederal spending for the major health care programs and Social Security would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years.”

The major health care programs and social security are likely to overtake all other components of spending by 2070 if no changes are made.

By the CBO's calculations for Social Security, people born in the ‘40s, ‘50s, and 60’s are likely to pay more in than they get out. This is largely because “benefits for earlier generations were considerably larger than their payroll taxes.” Those in the ‘70s and ‘80s are projected to receive more than they paid into the program.

The picture for Medicare is a little starker. The projected benefits received heavily outweigh the taxes paid. (The Medicare benefits are more difficult to predict, so the CBO only projects up to those born in the ‘60s.)

As the system (and current tax and spending policy) is designed currently, it isn’t sustainable. Projections through 2038 show that the gap between spending and revenues will continue to grow under current law. The projections are likely generous as well, as current tax policy is likely to stifle growth and prevent the economy from meeting its projections.

Either way, something must change going forward:

“The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices. Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

If entitlement reform doesn't happen, then payroll tax increases may end up as a part of the solution.


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