by Phil Dodd
Perhaps because I am now a few years past my 60th birthday, I’m a little more aware of the looming problems of social security. But social security’s long-term financial problems should be of concern to all of us. Unless something changes, anyone under 50 won’t be receiving full benefits when they are ready to retire, and those who are older could see benefit cuts in the midst of their retirements.
The problem, in a nutshell, is that the Social Security Trust Fund for retirees (where excess payroll contributions were stashed in the past) is expected to run out of money in 2034, according to a federal report issued in July. At that point — only 19 years from now — social security will be funded by payroll taxes alone, which means beneficiaries will receive only about 75 percent of their promised benefits.
A cut of 25 percent would be significant. Today, the average American retiree receiving social security gets $15,468 per year, and many retirees report that social security is their sole source of income. Meanwhile, traditional pensions are disappearing, and 401(K)s are proving to be an inadequate pension replacement.
There are several ways the shortfall could be fixed. One idea is to increase the retirement age, since people are living longer. The full retirement age has already gone up from 65 to 66, and it will be 67. If the base were increased significantly and the benefit formula remained the same, however, higher income individuals would receive even more in social security benefits than they do now, using up some of that additional revenue. If the formula were changed so those with higher incomes did not get more benefits, it could undercut the current broad support for social security. Moreover, I think we are soon going to need to raise federal taxes on higher income taxpayers for purposes other than social security, like balancing our annual national budget and putting a dent in our $18 trillion national debt.
Another solution would be to increase the payroll tax, which pays for both Social Security and Medicare and currently adds up to 15.3 percent (half paid by the employee, half by the employer). However, any increase would be challenging for those born after 1959 (everyone can still retire as early as 62, but with permanently reduced benefits). To save money, full retirement benefits could be delayed further, to age 68 or 70. But, after working for up to 40 or 50 years, most of us are eager to retire at an age when we could still be active and healthy.
Another solution would be to raise the wage base (only the first $118,500 of earned income, indexed for inflation, is subject to the payroll tax).
Is there another revenue source that could fill the gap and might also have some positive social impacts? I think a carbon tax fits the bill perfectly. It could raise a lot of money (maybe even enough to reduce the payroll tax), change behaviors in a productive way and it would not necessarily hurt the economy (Ireland passed a carbon tax a few years ago, and its economy is now outpacing the rest of Europe). The tax could be phased in over a period of years to avoid economic dislocations and to give people time to adjust their behaviors.
The most widely discussed argument in favor of a carbon tax is that it would help reduce usage of fossil fuels, which in turn could reduce the production of greenhouse gases. Most scientists think these gases are a leading cause of global warming. If they are right, we are on a perilous path to higher temperatures, agricultural disruption and rising sea levels, a path that should be avoided if possible.
There are some who do not believe global warming is caused by humans, however. But there is a second benefit from a carbon tax that is hard to deny: it would help conserve what remains of the earth’s limited reserves of oil, coal and natural gas. These fuels are not only important to us for transportation and heating, but they are used to produce everything from plastic to asphalt to fertilizer, even solar panels.
The earth’s fossil fuels were created by nature over 300 million years ago. Once humankind began tapping these resources, economies in developed countries took off and our global population soared from half a billion to seven billion. Doesn’t it make sense to conserve some of these valuable resources for future generations? To do so, we need to reduce the use of fossil fuels and transition to other energy sources. A carbon tax would help push us in that direction.
I’m not enthusiastic about enacting a carbon tax solely in Vermont, as some advocate, since that could put us at an economic disadvantage compared to other states. For example, tourists and vacation home buyers might avoid Vermont if gasoline and heating prices were significantly higher here than in neighboring states.
By contrast, a national carbon tax would create a level playing field for all states. And, since fossil fuel prices have dropped significantly in the last year, now is a perfect time to enact a national carbon tax.
It may take some public pressure for our dysfunctional federal government to step up and solve the social security problem, but the clock is ticking, and waiting will only make the problem harder to solve. Enacting a carbon tax now to fund social security would help us deal with two looming threats at once.