I’ve been emailing this afternoon with Andrew Biggs, a former official at the Social Security Administration who’s now at the American Enterprise Institute.
He argues that Mickey Kaus’s favorite solution for Social Security’s shortfall, means-testing the program, is a bad idea. When people talk about means-testing Social Security, what they typically mean is cutting or eliminating benefits for retirees who have more than the cutoff level of income from other sources. (I’m not sure if that’s what Kaus has in mind.) That punishes people for saving in IRAs and 401(k)s. President Bush’s proposal for progressive price indexing, on the other hand, would reduce benefits (compared to the levels in current law) based on people’s lifetime earnings. That reduction in future benefits, announced well in advance, would be an incentive to save more of those earnings. Biggs is pretty persuasive on its superiority to means-testing.
Biggs has also run some numbers on Obama’s proposal. Obama, recall, wants to apply payroll taxes on wages above $250,000 a year, rather than only on all wages under $102,000 a year. (So if you make $300,000, for example, you would be taxed on the first $102,000, pay no Social Security taxes on the next $148,000, and then be taxed again on the final $50,000. And you really ought to be donating to NRO, by the way.) Obama has not made it clear whether the tax rate on high-end wages would be the same as the tax rate on low-end wages. If it is, he is talking about a very large increase in the top marginal tax rate on income–”back to the levels of the 1970s,” as Paul Krugman suggests.
According to Biggs’s calculation, this large tax increase would eliminate only 36 percent of Social Security’s deficit over the next 75 years.