The impact of various social security reform proposals on tax progressivity and effective tax rates

Unless there are reforms, the Social Security system of the United States will not be able to pay the full amount of benefits promised to workers retiring in the future. The 1994-1996 Advisory Council on Social Security proposed three ways to "save" the system. These were the Maintain Benefits Plan, the Individual Accounts Plan, and the Personal Security Accounts Plan. The Maintain Benefits Plan had both a long and short term solution to the Social Security problem. The long term solution was to raise the payroll tax by 0.8% for both employees and employers and has been called the Maintain Benefits Plus Plan in this paper. This dissertation looks at both the income tax and the Social Security tax together to determine the effects of Social Security reform proposals on the progressivity and Effective Tax Rates of the overall federal tax system. Reform proposals were analyzed by income decile groups, per capita groups, and age groups. The current system, along with the Maintain Benefits Plan and the Personal Security Accounts Plan, was always more progressive than the Maintain Benefits Plus Plan and the Individual Accounts Plan, although the order of progressivity varied depending on the discount rate used and the type of group that was examined. In some cases the adoption of a Social Security reform proposal was shown to have large effects on the percent of tax paid by various groups of taxpayers. Social Security reform proposals tended to affect the tax burden of the poor the most, while the rich were hardly affected. A surprising result was that the percent of tax paid was almost the same as the percent of income for all age groups.