Comparing the High-Income Tax Cuts and the Social Security Shortfall
The Atlantic’s Megan McArdle has written another post about our comparison over the next 75 years of the Social Security shortfall and the cost of the Bush-era tax cuts for high-income taxpayers. The gist of Ms. McArdle’s argument seems to be that we’re not computing the present value of these two policies in the same way. That’s simply incorrect.
Our figure for the Social Security shortfall comes straight from the 2010 Social Security Trustees’ Report. The report estimates that the program’s shortfall over the long term (which the trustees define as the next 75 years) is equivalent to 1.92 percent of payroll subject to Social Security tax, or 0.7 percent of gross domestic product (GDP). (See Table IV.B5 on page 63 and Table VI.F4 on page 187.)
Note that the trustees don’t define the shortfall as simply the difference between the present value of the taxes Social Security will collect and the benefits it will pay out over the next 75 years. The trustees also take into account the current amount of the Social Security trust funds — something that Ms. McArdle has omitted.
We estimated the 75-year cost of the high-income tax cuts in a comparable manner. On Tuesday I listed the estimate’s three components, which total $837 billion (0.43 percent of GDP) over the 2011-2020 period and $120 billion (0.5 percent of GDP) in 2020 alone, according to the Treasury Department and Congress’s Joint Committee on Taxation.
We projected the cost of the tax cuts for another 65 years using their average rate of growth for 2017-2020, discounted the costs back to the present using a discount rate that averages about 5.25 percent, and expressed them as a percentage of GDP.
Ms. McArdle says that the tax law won’t stay the same for 75 years. That’s true, but Social Security law won’t stay the same for 75 years either. The whole point of projecting the long-term cost of policies is to help policymakers decide whether to continue or alter them. And our analysis showing that the Social Security shortfall is much smaller—and the cost of the high-income tax cuts is much larger—than they are often portrayed is designed to inform coming debates over the future of both policies.
Ms. McArdle also says that the Social Security shortfall eventually exceeds the cost of the high-income tax cuts. That’s true, too. But the cumulative amounts are about the same for the next 75 years, which is not “a time so brief as to be meaningless.”