Offsetting the Jobs Bill

Yesterday, the President offered a plan for how he would pay for his $447 billion jobs proposal. The pay-fors would come entirely from revenues, mainly from limiting itemized deductions and other tax expenditures for people earning over $200,000 ($250,000 for families) per year. Other offsets would include closing tax loopholes for oil and gas companies, taxing carried interest as ordinary income, and changing depreciation rules for corporate jets, to name a few.

These revenues provisions would not go into effect if the Super Committee identified at least $1.65 trillion in savings (the original $1.2 trillion requirement plus $450 billion for the jobs proposals).

Edward Glaeser offers an alternative offset, raising the Social Security retirement age. As he states:

"Raising the retirement age was always going to be part of any sensible entitlement reform, and this is the right time to start paying for current tax cuts with future benefit cuts. Inserting an offsetting retirement-age increase into the American Jobs Act would be a good way to show the world that the U.S. is getting serious about its finances."

This offset makes a lot of sense, particularly for the $240 billion payroll tax holiday. To finance the payroll tax holiday, the President has proposed transferring money from general revenues into the Social Security trust funds, which raises the concern that such transfers will become commonplace as the program’s yearly shortfalls deepen. Instead, that money could come out of the trust funds, and be offset with future changes.

According to our estimates, a holiday of this size would increase Social Security’s long-term actuarial imbalance by about 0.1 percent of payroll. In the context of a plan aimed at closing the 75-year shortfall of 2.22 percent of payroll and a 75th year gap of 4.28 percent of payroll, identifying an extra 0.1 percent should not be too difficult. This money could come not only from increasing the retirement age, but also a combination of gradual reductions in the benefit formula, adjustments to the tax base, and a correction to the measure of inflation used to calculate cost of living adjustments (COLAs). Such a comprehensive plan would easily pay for the payroll tax holiday over time, and might even do so within the decade (and some existing plans certainly would).

With population aging and health care costs set to push spending to ever increasing heights, we need savings that can grow over time. Social Security reform, in general, would do this. And raising the retirement age would have the added bonus of improve long-term growth by incentivize longer working lives. Comprehensive Social Security reform will be critical piece of a well-crafted fiscal plan, but so will reform to health care spending and the tax code.