Written by: Eugene Steuerle
Because past Congresses enacted a Social Security law requiring the benefits of current retirees to be cut in about a decade, proposals for Social Security reform are finally getting attention. Among the most popular are those that offer ways of making higher-income people, but not most of the population, cover most or all of the cost. Two recent articles provide examples. Laying claim to their conservative and liberal credentials, Andrew Biggs and Alicia Munnell suggested reducing or eliminating tax breaks for retirement accounts that favor those in higher tax rate brackets. Natasha Sarin proposed an array of “tax hikes on the wealthy and large corporations,” including not extending the temporary Trump tax cuts enacted in 2017.
Don’t get me wrong. Those with above-average incomes almost inevitably must give up something to deal with our nation’s extensive budgetary problems. They’ve got most of the money, and the gaping shortfalls of revenues relative to spending throughout the budget, not just in Social Security, aren’t going to be met without assessing higher taxes or lower government benefits on them.
However, both articles raise significant issues by trying to tie revenue-raising income tax reforms to Social Security’s trust fund problems.
First, if Congress does raise more revenues, these articles need to address where that money can best be spent. According to the Congressional Budget Office’s income distribution estimates, older people are now less likely to be poor or have lower incomes than the non-elderly. On a per-person basis, moreover, past Congresses have scheduled benefits for future retirees, mainly in Social Security and Medicare, to grow at rates forever faster than the rate of income growth for the rest of the population.
Both articles claim to be concerned with helping those with lower incomes. Providing an excellent minimum benefit in Social Security and using tax increases for the most pressing needs of the entire population, non-elderly and elderly alike, would be far more progressive than these authors propose.
Second, the notion of simply taking money from the wealthy fails to address what happens to the wealth of others. Take the case of removing tax subsidies for retirement plans, without which an employer would have no incentive to offer them. For most middle-class families, retirement savings and homeownership are the two main ways they accumulate wealth. Many people save for retirement only through employer-sponsored plans. Observe the small numbers of people who contribute directly to Individual Retirement and annuity plans. I grant that the current private retirement system serves many people badly and that benefits are skewed too much to a minority of households. However, that’s an argument for fixing and strengthening it, not abandoning the employer as an essential intermediary that encourages wealth building.
Don’t think that Social Security wealth is a complete substitute for private wealth, other than providing for consumption in retirement. There are no tangible assets behind Social Security “wealth.” Soon, there will be close to zero government bonds held by Social Security to meet its multi-trillion-dollar obligations. If promised payments in the future should be counted as assets, then promised tax collections necessary to pay for those benefits should be counted as liabilities.
Third, any attempt to put general revenue increases into the Social Security trust funds violates both public finance principles and Franklin Roosevelt’s basic design of Social Security. Among the silliest is that the Treasury would be required to make estimates of what the world would look like forever into the future as to the amount of revenues that would have been generated under some counterfactual like what employees would have contributed to retirement plans had various tax subsidies not been eliminated. Got that? Treasury would make this hypothetical estimate and make deposits to the Social Security trust fund under some algorithmic formula. Then, Social Security would mainly or entirely withdraw those sums immediately to pay current Social Security beneficiaries. All this would be done to look like benefits were being paid out of the trust fund.
The Social Security system is so broken that it may be forced to rely upon income tax and other general revenues. However, it is a well-known principle of public finance that no allocated portion of general revenues like income taxes should be dedicated to any specific purpose whose priority status within the budget may change over time. Imagine trying to engage in some worthy future income tax reform and then having to struggle with arguments that the reform can’t be done because it changes the amount of revenues dedicated to Social Security.
Fourth, the goal of simply extending the life of the trust funds for a few years, as Sarin suggested in a positive light, is an argument for continuing to increase future promised benefits at a much faster rate than revenues and leaving those rising burdens to be paid by future, not current, taxpayers. We’ve gone down their route for decades, with ever-rising total federal debt one of the consequences. It’s time to fix the system, not just temporarily throw more money into it.
I know and respect these authors. I agree with them on many fronts. I don’t see how reform can avoid asking more of higher-income people. I have long noted how the skewing of private retirement plan tax benefits fails much of the middle class and recognize that Social Security at this stage will likely need to rely upon either loans or direct infusions from general revenues. However, reform should not automatically prioritize using revenue increases for those who may need them less. Nor should it tie income tax and Social Security reform together into a fixed knot that makes much harder future reform of either one on its own merits.
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