Congress is ready to pass a Social Security reform bill that raises taxes and boosts benefits. But how will that affect the economy? In Ivy League economic model projects big trouble.
of the Social Security 2100 Act projects GDP in 2049 would be 2.0% lower than a hypothetical baseline in which the government borrowed to fund full promised Social Security benefits. The logic is straightforward: when taxes go up people work less; when Social Security benefits go up, people save less. If people work less and save less, the economy grows more slowly.
Of course, simply borrowing to fund Social Security benefits is not realistic. Instead, I asked the Penn Wharton team to model a stylized reform which raises the Social Security retirement age, reduces benefits progressively and pays lower Cost of Living Adjustments. The Penn Wharton model projects that this benefit-cuts reform would boost GDP in 2049 by 5.3%.
That 7.3% of GDP difference between the Social Security 2100 Act and a benefit-cuts reform plan equals $1.6 trillion per year in today’s terms, of which governments at all levels would collect about one-quarter in tax revenues. Put simply, the Social Security 2100 Act means substantially less money for Americans to spend and less tax revenues available for government programs.comparison
of seven economic models, including CBO’s and the Joint Committee on Taxation’s model, found that all seven projected that reducing future Social Security benefits would increase GDP as households work and save to make up for lower future Social Security benefits.. But middle and upper-income households can and will save more if their future Social Security benefits are scaled back. Reforms that focus benefit reductions on those more affluent groups would spur economic growth.
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