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Bernie Sanders's Social Security Expansion Act

Nov 7, 2019 | Social Security

This is the third policy explainer in our US Budget Watch 2020 series covering the 2020 presidential election. In the coming weeks and months, we will continue to publish analyses of candidate proposals that are having the greatest impact on the debate over our nation’s future. You can read more of our policy explainers and factchecks here.

Presidential candidate Senator Bernie Sanders (I-VT) has proposed the Social Security Expansion Act, which would increase Social Security benefits, raise taxes on high earners, and extend the solvency of the program’s trust fund.

Under current projections, the Social Security trust fund is only 13 to 16 years from insolvency, at which point all beneficiaries would face a 20 to 25 percent benefit cut without new legislation.

As we explain below, Senator Sanders's Social Security plan would:

  • Close three-quarters of Social Security’s 75-year shortfall and half of its structural shortfall, according to Social Security’s Chief Actuary (we believe the Congressional Budget Office (CBO) would estimate the plan closing half of the solvency gap and one-third of the structural shortfall)
  • Return Social Security to surplus for eight years and extend solvency by 37 years until 2071, according to the Chief Actuary
  • Reduce unified budget deficits by $1.4 trillion over the next decade and by 0.45 percent of Gross Domestic Product (GDP) in 2050 relative to CBO’s baseline, based on our estimates
  • Reduce debt by 14 percent of GDP in 2050 relative to CBO’s baseline, based on our estimates
  • Increase unified budget deficits by 1.35 percent of GDP and increase debt by 18 percent of GDP in 2050, by our estimates, relative to a “payable-benefits scenario” where spending is limited to revenue upon trust fund exhaustion, as the law requires

Incorporating dynamic scoring could lead to somewhat less favorable results as higher tax rates and benefit levels may reduce the incentive to work, save, and invest.

What’s in the Social Security Expansion Act?

The Social Security Expansion Act both expands benefits and increases taxes.

The proposed benefit expansions would:

  • Gradually increase the lowest Primary Insurance Amount (PIA) factor in the benefit formula from 90 percent of a worker's first $11,000 of average income (roughly) to 105 percent by 2040 – increasing benefits for most workers by about $2,200 per year in 2040 (the increase would be about $1,000 per year if in place today)
  • Adopt the faster-growing, experimental Consumer Price Index for the Elderly (CPI-E) for Cost-of-Living Adjustments (COLAs)
  • Create a minimum benefit of 125 percent of the poverty line for people who have worked 30 years or more
  • Allow children of disabled or deceased workers to continue receiving benefits until age 22, as long as they remain in school

Proposed revenue increases would:

  • Apply the 12.4 percent payroll tax – currently imposed on income up to $132,900 – to earnings above $250,000 without including wages above $250,000 in benefit calculations
  • Close the “donut hole” between $132,900 and $250,000 over time by allowing the lower threshold, which is wage-indexed, to catch up with the frozen higher threshold
  • Apply a new 6.2 percent tax on net investment income – including capital gains, dividends, and most business income – in excess of $200,000 for single filers and $250,000 for married couples filing jointly
  • Combine the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds into one Social Security trust fund

How Would the Social Security Expansion Act Impact Social Security's Solvency?

According to an analysis from the Social Security Chief Actuary, Senator Sanders’s Social Security plan would improve but not restore solvency. While the revenue increases by themselves would be sufficient to close 110 percent of Social Security’s 75-year gap, the benefit increases and expansions would worsen the shortfall by approximately one-third.

Overall, the Social Security Expansion Act would close about three-quarters of Social Security’s 75-year shortfall, extending the date of insolvency by 37 years from 2034 at the time of the estimate (2035 under newer projections) to 2071 under the plan. Upon insolvency, all benefits would be cut by 11 percent.

Provision Change in 75-Year Shortfall Change in 75th Year Shortfall
Benefit Increases and Expansions    
  Change the benefit formula to increase benefits across the board -13% -16%
  Adopt CPI-E for COLAs -14% -13%
  Provide a new minimum benefit for low earners based on years in the workforce -4% -4%
  Allow students to receive benefits until age 22 -2% -1%
Subtotal -33% -34%
       
Offsets and Solvency Measures    
  Apply the payroll tax to wages above $250,000 and ultimately to all wages 77% 57%
  Apply a 6.2% tax on investment income above $200,000 33% 27%
  Combine the OASI and DI trust funds into single trust fund 0% 0%
Subtotal 110% 84%
       
Total Impact on Social Security Shortfall 78% 51%
       
Rough Estimate of Impact Using CBO Methods ~50% ~35%
       
Additional Years of Surplus +8 Years
Additional Years of Solvency +37 Years

Source: CBO, Social Security Administration, CRFB calculations.

The plan would do less to close Social Security’s structural gap. Under current projections, Social Security faces a deficit of 1.06 percent of taxable payroll this year, which is projected to rise to 4.11 percent by 2093. Senator Sanders’s bill restores surpluses for eight years though 2027, after which deficits would return and would widen over time. Ultimately, the proposal would close about half of Social Security’s structural gap – with revenue increases closing about 85 percent of the gap and benefit increases widening it by about one-third.

CBO estimates a larger Social Security shortfall. Under its shortfall estimates and methods, we would expect the proposal to be less effective in improving solvency. In very rough terms, we predict CBO would estimate the proposal to close about half of the solvency gap and one-third of the structural gap.

What Effect Would the Social Security Expansion Act Have on Deficits and Debt?

Projections from CBO and others assume full Social Security benefits will be paid even after the trust fund exhausts its reserves. Compared to this baseline, Senator Sanders’s plan would significantly reduce budget deficits – particularly in the early years when revenue increases are in full effect but benefit increases are still phasing in. However, these savings would be partially offset by reductions in income tax revenue resulting from the bill. The proposal would represent a significant deficit increase relative to a payable-benefits scenario where Social Security benefits were reduced to match incoming revenue after trust fund depletion.

Adapting the Chief Actuary’s estimates to CBO’s economic assumptions, we estimate the Social Security Expansion Act would reduce Social Security’s deficits by $2.3 trillion over the first decade. However, the proposed tax increases would expand deficits for the rest of the federal government. In particular, increasing the amount of payroll taxes employers pay for high earners will lead employers to pay less in wages, resulting in lower income tax collection. At the same time, increasing the tax rate on net investment income will have significant behavioral effects for capital gains realization, resulting in lower collections on ordinary capital gains. Revenue is gained for the Social Security trust fund, but a lesser amount of revenue would be lost to the rest of the federal government.

We estimate these interactions would result in about $900 billion of “on-budget” revenue losses, for a total reduction in unified budget deficits of about $1.4 trillion through 2030 (both excluding interest).

By 2030, we estimate the proposal would reduce the annual deficit (excluding interest) by over 0.50 percent of GDP (the equivalent of $1.4 trillion over the next decade) – the net result of 1.05 percent of GDP in higher payroll tax revenue, 0.15 percent of GDP more in benefits paid, and over 0.35 percent of GDP in lost income (and other) tax revenue.

By 2050, we estimate the proposal would reduce the annual deficit (excluding interest) by about 0.45 percent of GDP (the equivalent of $1.2 trillion over the next decade) – the net result of over 1.30 percent of GDP in higher payroll tax revenue, over 0.45 percent of GDP more in benefits paid, and nearly 0.45 percent of GDP in lost income (and other) tax revenue.

Provision (Billions of $) (% of GDP)
2021-2030 2030 2040 2050
Benefit Expansions        
  Change the benefit formula to increase benefits across the board $0 0% -0.05% -0.15%
  Adopt CPI-E for COLAs -$165 -0.10% -0.15% -0.20%
  Minimum benefit increase and student benefits -$110 -0.05% -0.10% -0.10%
Subtotal -$275 -0.15% -0.30% -0.45%
           
Tax Increases        
  Apply the payroll tax to wages above $250,000 and ultimately to all wages (Social Security impact) $1,825 0.75% 0.95% 1.00%
  Apply a 6.2% tax on investment income above $250,000 (Social Security impact) $750 0.30% 0.30% 0.30%
  Non-Social Security interactions -$900 -0.35% -0.40% -0.45%
Subtotal $1,675 0.70% 0.85% 0.90%
           
Total Deficit Impact $1,400 0.50% 0.55% 0.45%
Impact on Social Security Deficit Only $2,300 0.90% 0.80% 0.90%
Impact on On-Budget Deficit Only -$900 -0.35% -0.40% -0.45%
Deficit Relative to Payable-Benefits Scenario $1,400 0.50% -1.25% -1.35%

Source: CBO, Social Security Administration, CRFB calculations; All numbers exclude interest.1

Note: Numbers in table may not add due to rounding.

Relative to a payable-benefits scenario, the plan would reduce deficits by the same amounts through the insolvency date but increase deficits thereafter. By 2050, we estimate the proposal would increase deficits by a total of 1.35 percent of GDP (the equivalent of $3.7 trillion over the next decade). We would expect that gap to widen further beyond 2050.

Senator Sanders’s plan would have a similar effect on debt; debt-to-GDP would grow slower relative to CBO’s baseline but faster relative to a payable-benefits scenario. Under CBO’s baseline, debt would reach about 155 percent of GDP by 2050, as opposed to 123 percent under a payable-benefits scenario. We estimate debt under Senator Sanders’s plan would rise to 141 percent of GDP by 2050 (including interest) – a 14 percentage point reduction from baseline but still 18 percentage points above payable-benefits levels.

These numbers could differ somewhat if dynamic feedback were included. Lower deficits resulting from the plan would tend to improve the economy by increasing investment and reducing interest rates. However, higher taxes and benefits would weaken the economy by reducing the incentive to work, save, and invest and increasing the incentive to retire early.

The net effect of the proposal on the economy is ambiguous. However, it would most certainly do less to grow the economy than the Goldwein-MacGuineas-Towner pro-growth framework (which the authors estimate would increase Gross National Product by 3.5 to 13 percent by 2050) or the payable-benefits scenario (which CBO says would raise GNP by 2.3 percent by 2049), and it is likely to shrink the economy relative to CBO’s baseline – particularly in conjunction with Senator Sanders’s other proposed tax increases, which could bring tax rates near or above their revenue maximizing levels.

CBO estimates that under the payable-benefits scenario, the 2.3 percent of additional GNP would further reduce debt by about 7 percent of GDP. If the Sanders plan resulted in slower economic growth, it could lead to slightly higher debt and reverse some of the savings from the plan.

Where Can I Read More?

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With the 2020 campaign now in full gear, the presidential candidates are putting forward many ambitious proposals aimed at solving very real problems and concerns. The voting public deserves to know how much these proposals will cost, and what it means for the debt we will be leaving to our children and grandchildren.

This policy explainer is part of our US Budget Watch series covering the 2020 presidential election. In the coming weeks and months, we will continue to publish analyses of candidate proposals that are having the greatest impact on the debate over our nation’s future. You can read more of our policy explainers and factchecks here.

Note: A previous version of this post inadvertently featured an earlier draft of the introductory section. That has been corrected above.


1 To arrive at these projections, we took estimates of the effects of the plan’s provisions on Social Security spending and revenues from the Social Security Administration’s actuarial analysis, which are given in terms of percentage of taxable payroll. We then used long-term estimates of taxable payroll and GDP from CBO’s 2019 Long-Term Projections for Social Security – which are more recent than those included in the actuarial assessment – to translate those effects into nominal dollars. We also used CBO’s recent score of Representative John Larson’s Social Security 2100 Act to adjust the actuarial estimates to reflect CBO’s assumptions.

Furthermore, because the actuarial assessment only includes effects on Social Security’s dedicated revenue streams, we further adjusted the actuarial estimates to incorporate interactions that reduce tax revenue from other sources like the income tax and the capital gains tax.