Although lots of specifics of the Trump tax plan are unclear at the moment, one thing is certain. Tax revenue for the government will go down, which means it will have to find that lost money elsewhere.
The Trump administration believes it has a handle on keeping the budget in line, but its calculations may not pan out the way it hopes. One sure way of making the math of the tax plan work would be to raise the age for full Social Security benefits from 67 to 70, an argument that Martin Feldstein, a Harvard economics professor and former adviser to President Reagan, made this week in the Wall Street Journal.
The Trump tax plan, which reduces the corporate tax rate from 35% to 15%, is part of a larger budget proposal that also entails raising defense spending to at least 4% of the nation’s gross domestic product, up from 2.6% now.
Balancing an increase in spending with a decrease in tax revenue will require a number of measures to make the figures work, such as levying a 20% border adjustment tax. It’ll also require an assumption of a big and consistent increase in economic growth, which many supporters of the plan will happen as a result of the cuts. But those assumptions may not bear out, leaving a gaping hole in the budget.
Delaying Social Security benefits for retirees could fill that hole. Government spending on the safety net of Medicaid, Medicare, and Social Security currently accounts for 10.4% of GDP and is projected to rise to 12.9% over the next ten years. Raising the full benefit age of Social Security to 70, from its current range of 66 to 67, would alleviate part of this problem by reducing the program’s costs by 15%, or about 1% of GDP.
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Raising the Social Security age would also provide some help for the program’s funding issues. As Americans are living longer, their increased lifespans are putting stress on the foundation of Social Security, which was formed under the assumption that people generally wouldn’t live all that much longer after they hit age 65. The Social Security trust is projected to be exhausted by 2029, at which time either taxes will need to be raised markedly or benefits will have to be cut as much as 30% in order to keep the program afloat. By delaying the age for full benefits, the government could avert that crisis for decades.
Such a move has already worked in the past. In 1983, President Reagan struck a deal to gradually gradual phase in a raising of the age from 65 to 67, in response to similar solvency issues.
It should be noted that one option Feldstein doesn’t mention is raising the Social Security tax’s maximum taxable earnings. The current cap on the Social Security tax is $127,200, meaning anything earned more than that isn’t subject to the tax. Roughly 10% of Americans earn more than that, some of them significantly more, which leaves an enormous untapped pool of money that could be used to shore up the program.