Veronique De Rugy
Social Security is struggling with enormous deficits. It is insolvent. No one will be able to escape that reality for the next decade – despite decades of politically opportunistic denial. But today both presidential candidates, Vice President Kamala Harris and former President Donald Trump, announced they will not touch the program. In fact, Trump wants to make it even more insolvent by increasing the taxes that retirees pay on their benefits.
Don’t get me wrong, I’m all for lower tax rates. I also believe that the current tax structure on Social Security provides a huge incentive for retirees who may want to go back to work but aren’t. And these kinds of work disincentives in the tax code are bad. While lower Social Security taxes might encourage some retirees to go back to work, if that’s not accompanied by Social Security reform, that will in turn cause more dramatic problems, which neither Trump nor Harris are willing to acknowledge.
Social Security is already in a big financial mess. Current benefit taxes bring in about $87 billion in revenue each year, in addition to payroll tax revenue. Yet Social Security is insolvent. Currently, Social Security’s main fund is projected to run dry by 2033. According to the Committee for a Responsible Budget, exempting Social Security benefits from taxes would bring that date forward to 2032 (it would also run dry the Medicare trust fund six years earlier).
Why should you care? Because the law requires that in the event of bankruptcy, Social Security benefits must be cut by 23% unless Congress reforms the program.
If Congress and the administration decide to keep the benefits and fund them with borrowed money, the U.S. Treasury will have to borrow $39 trillion over 30 years (on top of the $77 trillion it has already borrowed for Medicare). This, of course, is on top of the already large deficits and debt we have accumulated. Without taxes on benefits, that deficit will be even larger. It is important to remember that insolvency is the very reason these taxes were created in the first place. The decision to tax benefits was not made until 1983, when the program was already in financial trouble. Additional taxes and an increase in the payroll tax were seen as necessary means to keep the program solvent.
However, Congress should have reformed the program more thoroughly at the time. The original conception of the program envisaged bankruptcy. But Congress chose a more politically convenient and less responsible path. Today we are paying the price for this political cowardice.
Raising taxes on Social Security benefits would also be very unfair. Contrary to popular belief, seniors are overrepresented in the top income quintile. Brian Riedl wrote, “Seniors have the lowest poverty rate of any age group, and their median household income has grown four times as fast as the average worker since 1980.” In comparison, younger people currently collecting retirement benefits tend to be at the lower end of the income distribution. In this way, Social Security redistributes benefits from low-income to higher-income Americans. Raising taxes would exacerbate this inequality.
Moreover, retirees already receive more in benefits than they paid in. According to a calculation by the Urban Institute, a couple with two median earners retiring in 2025 will receive $831,000 in benefits over their lifetime, but will have paid “only” $783,000 into the program – all converted to net present value. The bottom line is that some retirees could absolutely handle welfare reform. Instead, raising taxes on these relatively wealthy retirees is a slap in the face for younger and poorer workers.
The bottom line is that exempting Social Security benefits from taxation is a bad idea. So why is it being proposed? Because politicians are rewarded for promising to enrich voters, which includes showering them with money. A new paper by Stan Veuger of the American Enterprise Institute, Jeffrey Clemens of the University of California, San Diego, and Julia Payson of the University of California, Los Angeles, examines spending during the pandemic and shows that politicians are being rewarded at the ballot box for doling out deficit-funded benefits and making future generations pay for them.
Whatever role voters play in this mess, the biggest threat to Social Security is not the current tax structure but the deliberate political denial of the program’s looming insolvency. By addressing these challenges head-on sooner rather than later, we can preserve the integrity of the system and uphold the intergenerational contract that has long been at the heart of Social Security. Now is the time for meaningful reforms before financial realities force far more drastic and painful measures in the future.
© 2024, Creator
