No one can deny that Social Security is insolvent and faces large deficits over the next decade that will impact Social Security benefit payments for millions of recipients across the country. Vice President Kamala Harris and former President Donald Trump have both declared they won’t touch the program, despite decades of denial. Trump intends to increase insolvency by eliminating taxes on benefits. Although lower tax rates are welcome, seniors are encouraged to stay out of the workforce because of the current benefit tax structure. These disincentives to work are harmful. While lowering Social Security taxes would encourage some seniors to return to work, other problems could arise if Social Security benefits are not changed.
Social Security benefit taxes can be a problem for the US
Even now, Social Security faces serious financial difficulties. In addition to the money from payroll taxes, current benefit taxes provide an additional $87 billion a year in revenue. Social Security is already bankrupt. It is currently estimated that Social Security’s primary trust fund will be exhausted by 2033. Exempting Social Security benefits from taxation would move that date up to 2032, according to the Committee for a Responsible Budget (it would also deplete the Medicare trust fund six years earlier). Furthermore, beneficiaries should be aware of this matter, as insolvency laws mandate a 23% cut in Social Security benefits unless Congress reforms the program.
The U.S. Treasury will have to borrow $39 trillion over 30 years (in addition to the $77 trillion borrowed for Medicare) if Congress and the Administration choose to preserve benefits and pay for them with borrowed money. Of course, this will be on top of our already significant debt and deficits. If there were no benefit taxes, this deficit would be much larger. It is important to remember that these taxes were originally introduced because of insolvency. It was not until 1983, when the program was already in financial trouble, that the decision was made to tax benefits. It was believed that higher payroll and other taxes were essential to maintaining the program’s viability. But at the time, Congress should have made more significant changes to the program. The original design of the program allowed for the possibility of insolvency.
Nevertheless, Congress chose a less responsible, more politically expedient course, which led to Americans now paying the price for that political cowardice. Raising taxes on Social Security benefits would be unfair because seniors are overrepresented in the top income quintile, have the lowest poverty rate of any age group, and their average household income has grown four times faster than that of the average worker since 1980. In contrast, the younger people who are now paying for the benefits of the elderly are more likely to come from lower-income households. Social Security thus transfers benefits from lower-income Americans to higher-income Americans. Thus, raising taxes would exacerbate the imbalance that already exists.
Why is Social Security tax exclusion a bad idea?
A study by the Urban Institute shows that seniors are already receiving more in Social Security payments than they have contributed. Although they will have paid only $783,000 into the program, a couple with two average earnings retiring in 2025 will receive $831,000 in lifetime benefits. Cutting taxes for these wealthy seniors will hurt younger and less wealthy members of the current workforce. Additionally, it is a terrible idea to exempt Social Security benefits from taxes because politicians stand to gain financial and other benefits by promising to provide deficit-financed payments, such as during pandemic-era spending.
Besides, future generations will end up having to pay for these advantages as a result. The primary threat to Social Security is not the current tax structure but the political denial of the program’s looming insolvency. Addressing these challenges sooner can preserve the integrity of the system and uphold the intergenerational compact. The time for meaningful reform is now before financial realities force more drastic action in the future.
