Social security faces a huge gap. It is already insolvent. In the next decade, no one will be able to avoid this reality—despite decades of political denial. Yet as of today, both presidential candidates, Vice President Kamala Harris and former President Donald Trump, have announced they will not touch the plan. In fact, Trump hopes to make it even more insolvent by raising taxes on senior benefits.
Don’t get me wrong, I like lower tax rates. I also think that the current welfare tax structure creates a huge incentive for older people who might want to re-enter the workforce to choose not to do so. These types of job disincentives in the tax code are bad. While reducing Social Security taxes may encourage some seniors to return to work, this in turn could create a more serious problem if not accompanied by reform of Social Security benefits, which neither Trump nor Harris is willing to admit.
Social Security is indeed in serious financial disarray. In addition to payroll tax revenue, current benefit taxes generate approximately $87 billion annually. Even so, Social Security remains insolvent. Currently, major Social Security trust funds are expected to be depleted by 2033. .
Why care? Because by law, when a bankruptcy occurs, Social Security benefits must be cut by 23% unless Congress reforms the program.
If Congress and the administration decided to maintain benefits and pay for them with borrowed funds, the Treasury would have to borrow $39 trillion over 30 years (not including the $77 trillion borrowed for Medicare). Of course, that doesn’t include the massive deficits and debt we’ve incurred. Without a welfare tax, the shortfall would be even greater. It’s worth remembering that bankruptcy was in fact the reason these taxes were introduced in the first place. It was not until 1983, when the program was already in financial difficulty, that the decision to grant tax incentives was made. Additional taxes and payroll tax increases are seen as necessary to maintain the program’s solvency.
However, Congress should have made more fundamental changes to the program at that time. The way the plan was originally designed ultimately led to bankruptcy. But Congress took a politically more convenient and less accountable route. Today we are paying the price for this political cowardice.
Eliminating the Social Security benefit tax is also deeply unfair. Contrary to popular belief, older people are overrepresented in the top income quintile of the population. As Brian Riedl writes, “Older adults have the lowest poverty rates of any age group, and their average household income has grown four times as fast as the average worker since 1980.” By comparison Under the circumstances, young people currently paying for old-age benefits are more likely to be at the bottom of the income distribution. In this way, Social Security redistributes benefits from low-income Americans to high-income Americans. Eliminating taxes would make this inequality even worse.
Additionally, seniors already receive more in Social Security benefits than they pay. , but “only” $783,000 was paid for the plan – all adjusted to net present value. The bottom line is that there are some seniors who absolutely could live with welfare reform. Conversely, eliminating taxes on these relatively affluent seniors is a slap in the face to young and poor current workers.
The bottom line is that exempting Social Security benefits from taxes is a bad idea. So why bring it up? Because politicians are rewarded when they promise to enrich their constituents, including giving them large sums of cash. A new paper by Stan Weig of the American Enterprise Institute, Jeffrey Clemens of UC San Diego, and Julia Person of UCLA examines pandemic-era spending and suggests that politicians They are rewarded at the ballot box for delivering deficit-funded benefits and leaving future generations to pay the price.
Whatever role voters play in this mess, the greatest threat to social security is not the current tax structure but the willful political denial of the program’s impending bankruptcy. By addressing these challenges head-on and early on, we can preserve the integrity of the system and uphold the intergenerational contract that has long been at the heart of Social Security. The time for meaningful reform is now, before financial realities force tougher and painful measures in the future.
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