Both plans would mitigate program shortfalls but reduce economic output
PHILADELPHIA, March 10, 2020 — Despite its importance to American retirees, the Social Security program faces large future financial shortfalls as projected benefits dwarf projected revenues. Democratic presidential candidates Joe Biden and Bernie Sanders have both proposed Social Security reform packages that seek to narrow this gap by raising taxes on high-earning workers while still increasing the program’s benefits, especially for low-earners. The Sanders plan, however, includes larger components on both the tax and the benefit side.
Penn Wharton Budget Model (PWBM) has analyzed the budgetary and economic effects of both candidates’ Social Security plans, projecting that:
- The Biden plan would reduce Social Security’s 75-year actuarial imbalance by 1.5 percent of taxable payroll, leaving an imbalance of 2.0 percent of taxable payroll, and would shrink the economy by 0.8 percent in 2050.
- The Sanders plan would reduce Social Security’s 75-year actuarial imbalance by 2.3 percent of taxable payroll, leaving an imbalance of 1.2 percent of taxable payroll, and would shrink the economy by 1.0 percent in 2050.
Both plans shrink the economy because of reduced investment and a new type of payroll tax—the “donut hole” tax—which discourages work by more than the standard payroll tax. The Sanders plan implements a larger donut hole tax while also raising direct taxes on high investment returns, thus reducing the Social Security program’s budgetary shortfall by a larger amount.
The economic benefits of this additional debt reduction, however, are outweighed by the larger disincentive effects of these provisions. The Sanders plan therefore leads to a slightly larger drop in economic output.
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About the Penn Wharton Budget Model
PWBM is a nonpartisan, independent applied research organization housed at the Wharton School of the University of Pennsylvania. PWBM works directly with policymakers and staff, serving as an honest broker by providing accurate, accessible and transparent economic analysis of the fiscal and economic impact of public policy without advocacy. PWBM’s estimates are regularly referenced by policymakers and top news outlets. For more information, visit https://budgetmodel.wharton.upenn.edu/
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