Social Security 2100 Would Not Provide Necessary Path to Solvency

Dear Chair Larson, Ranking Member Reed, and Members of the Subcommittee:

On behalf of National Taxpayers Union (NTU), the nation’s oldest taxpayer advocacy organization, I write to express NTU’s significant concerns with and opposition to H.R. 5723, “Social Security 2100: A Sacred Trust,” as currently written.^[1] This legislation relies on budgetary gimmicks to be “fully paid for,” and would fall 62 years short of its ostensible goal to make Social Security a sustainable and solvent program through the year 2100. We urge lawmakers to make substantial changes to the legislation before advancing it in Committee, or otherwise abandon this legislation in favor of more durable and taxpayer-friendly approaches to shoring up Social Security solvency.

NTU and its experts have written about previous iterations of the Social Security 2100 proposal, including former Senior Fellow Mattie Duppler’s testimony before this Subcommittee in April 2019^[2] and in July 2020.^[3] In each of Ms. Duppler’s statements, she and NTU noted that while it is “laudable” that Social Security 2100 attempts to “put Social Security on secure financial footing,” the proposed payroll tax rate increases in previous iterations of this legislation “[reduce] take-home pay for workers” and “[raise] the cost of doing business for employers.”^[4]

The 2021 edition of Social Security 2100 drops proposed payroll tax rate increases, but in so doing leads the proposal to fall more than six decades short of its theoretical goal: solvency through 2100. Instead, this iteration of the proposal significantly expands Social Security benefits on a temporary basis (in most cases, from 2022-26), funding these temporary expansions with permanent tax increases that could impact employee and employer decision-making for years to come. In so doing, Social Security 2100 creates poorly designed and harmful cliffs that the proponents of the legislation have not proposed how to fund beyond the next five years.

Indeed, a dozen of the benefit expansions proposed in the new Social Security 2100 would only exist through 2026. A reasonable observer of the political dynamics surrounding Social Security could assume that there will be enormous pressure to extend these expanded benefits towards the end of 2026, even though lawmakers today have not envisioned commensurate offsets to ensure these expanded benefits last beyond 2026.

These benefit expansions are large enough that, even with a significant and permanent increase in payroll tax liabilities for certain workers, the legislation’s proponents note that projected solvency for the combined Social Security trust funds will only be extended for four years, from 2034 to 2038. It’s unclear why this proposal is called “Social Security 2100” when the proposal only settles a small portion of the gap between 2034 and 2100.

It’s also not clear that policymakers have fully grappled with the impacts of (and potential taxpayer responses to) the provision levying payroll taxes on income above $400,000 per year.

First, if the intention is to one day close the gap between the current Social Security taxable maximum ($147,000 in 2022^[5]) and the $400,000 threshold in Social Security 2100, policymakers should be aware that potentially up to one in five workers could see an increase in payroll taxes during their lifetime.^[6] While this provision may affect only “the top 0.4% of wage earners” at present, as noted by the bill’s proponents,^[7] it may affect a much higher proportion of workers for at least one year of earnings over the long term.

Second, policymakers should be aware that taxpayers may respond to this payroll tax increase in unpredictable ways. The Congressional Research Service (CRS) notes that workers may have an incentive to shift current wage compensation to fringe benefits that are not subject to the payroll tax, such as health insurance.^[8] CRS adds that employers that cannot pass their portion of increased payroll taxes on to employees “may react by raising prices to consumers; reducing other nonwage forms of compensation, such as health benefits or pensions; or reducing the number of workers.”^[9]

Finally, policymakers should consider how this revenue proposal may impact business formation and operation decisions among the self-employed. Sole proprietors typically pay a higher rate on the payroll tax, since they are responsible for both the employee and employer portions of the payroll tax (i.e., 12.4 percent of taxable income), whereas wage and salary employees are only responsible for the employee side (i.e., 6.2 percent of taxable income). As Tax Notes’ Marty Sullivan wrote in a 2005 analysis, changes to the payroll tax base -- like those envisioned in Social Security 2100 -- could incentivize sole proprietors to shift to subchapter S status to avoid the payroll tax:

“...instead of operating as a sole proprietorship, a self-employed individual can incorporate the business and elect subchapter S status. All of the sole proprietorship’s income would be subject to payroll tax. An S corporation could pay its employee-owner a reasonable salary and pay the remaining business profit in the form of dividend not subject to payroll tax.”^[10]