American finances are bleak and no one seems to care. As of fiscal 2019, the federal debt is over $22 trillion, with a deficit of nearly $992 billion. The Congressional Budget Office projects that, under current law, the federal debt will grow to 98 percent of gross domestic product by 2030. Entitlement programs like Social Security and Medicare will also require tax hikes, benefit reductions, or both to pay for promised benefits.
But all this bad news has not stopped some Washington policymakers from proposing more benefits and new entitlement programs, along with higher taxes to pay for the expansions. To make the added costs palatable to the public, lawmakers such Reprepresentative John Larson, who is the chairman of the House Ways and Means Social Security Subcommittee, have described the cost of these new taxes as “just a cup of coffee.”
As the author of the proposed Social Security 2100 Act, which is meant to “strengthen benefits” and “ensure Social Security through this century,” Larson would achieve these goals by gradually raising the Social Security payroll tax rate from 12.4 percent, which is split evenly between workers and employers, though workers bear the cost of the employer share in the form of lower wages, by 0.1 percent a year over 24 years, then reaching 14.8 percent in 2043. This would mean a considerable 19 percent increase in the payroll tax burden of low income workers over time.
Larson defends the higher taxes in his proposal. “For the average worker this means paying an additional 50 cents per week every year to keep the system solvent,” he stated. Larson explained that a $4.50 Starbucks latte would “cover nine weeks” of higher taxes for a worker making $50,000 a year, implying that it is easy to cover the higher taxes just by skipping an occasional latte. He thinks skipping six cups a year will do it.
But not quite. His “50 cents a week” only applies to the half of the Social Security tax paid by workers, and it would increase every year. By 2029, the combined Social Security taxes for a $50,000 earner would rise to $6,700, which is $500 more than taxes today, or the equivalent of more than 100 lattes skipped that year instead of just six. By 2043, a $50,000 earner would have to pay $7,400 in annual Social Security taxes, which is $1,200 more than today, and would have to skip 250 lattes.
Moreover, that is only to pay for Social Security. The majority of the bill supporters also back the Family Act, which would create a new federal paid leave program financed by an entirely new federal payroll tax. The sponsor of that legislation, Senator Kirsten Gillibrand, also uses a coffee analogy to describe the new tax. “It covers every working American for about the cost of a cup of coffee per week,” she explained.
But a recent report by the Congressional Budget Office suggests that the payroll tax in the bill is too low to cover promised benefits. The required tax would actually cost a $50,000 worker $325 every year, requiring the worker to give up 72 lattes per year. While an actual “latte gap” of 20 cups may seem doable, the math by Gillibrand does not include the many other coffees that workers will have to give up to cover plans like Medicare for All, Green New Deal, “free” college tuition, and other proposals.
The average American spends $1,110 a year on coffee, while 41 percent of millennials admit that they spend more money on coffee than they save for retirement. This is why financial advisers have long stressed the “latte factor,” urging young workers to skip lattes or similar indulgences and set aside the savings for retirement. That is sound advice, so it was probably inevitable for our politicians to adopt the same metaphor to describe the supposedly small sacrifices to cover the cost of their new spending plans. But coffee drinkers beware. What is billed as an occasional cup of coffee skipped today might wind up as a whole lot of lattes tomorrow.
Within a little more than a decade, Social Security and other planned tax increases already promise to cost more than what the average American spends all year on coffee. Furthermore, those are just the tax hikes that policymakers are willing to admit. These do not include all of their other spending plans. The bottom line is that our federal budget challenges are serious, and they will not be solved by minimizing the sacrifices required to fix them, much less pay for any new spending plans. That is definitely something to contemplate when you drink your next cup of coffee.
Matt Weidinger served for more than two decades as a staff member of the House Ways and Means Committee. He now works as a resident fellow in poverty studies at the American Enterprise Institute based in Washington.