Trump’s Plan To Remove Taxes on Social Security Will Backfire Unless It’s Paired With Reforms

Social Security is facing enormous shortfalls. It is insolvent. Within the next ten years, no one will be able to avoid this reality — despite decades of politically expedient denial. Yet as of today, both presidential candidates, Vice President Harris and President Trump, have announced they won’t touch the program. Trump wants to make it even more insolvent by lifting taxes seniors pay on benefits.Don’t get me wrong, I love lower tax rates. I also believe the current tax structure on benefits creates a large incentive for seniors who may want to reenter the workforce to choose not to do so. And these types of work disincentives in the tax code are bad. While reducing Social Security taxes may encourage some seniors to go back to work, it will in turn cause more dramatic problems if not paired with reform to Social Security benefits, something neither Trump nor Ms. Harris cares to recognize.Social Security is in a big financial muddle as it is. Current benefit taxes bring in about $87 billion in revenue each year, in addition to the payroll tax revenue. Even still, Social Security is insolvent. Currently, it is projected that the main Social Security trust fund will dry out by 2033. According to the Committee for a Responsible Budget, exempting Social Security benefits from taxation would move that date forward to 2032 — it will also dry up the Medicare trust fund six years sooner.Why should you care? Because law requires that when insolvency happens, Social Security benefits will have to be cut by 23 percent unless Congress reforms the program.If Congress and the administration decide to maintain the benefits and pay for them with borrowed funds, the American Treasury will have to borrow $39 trillion over 30 years — on top of $77 trillion borrowed for Medicare. This will be in addition to the already large deficits and debt we have incurred. That shortfall will be even larger without taxes on benefits. It is worth remembering that insolvency is in fact the reason why these taxes were adopted in the first place. The decision to tax benefits didn’t happen 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.Congress, however, should have reformed the program more fundamentally back then. The way the program was initially designed baked in eventual insolvency. Yet Congress took a more politically convenient, less responsible route. Today, we are paying the price for this political cowardice.Lifting taxes on Social Security benefits would also be very unfair. Contrary to common belief, seniors are overrepresented in the top income quintile. As Brian Riedl wrote, “Seniors have the lowest poverty rate of any age group, and their average household incomes have grown four times as fast as the average worker since 1980.” Comparatively, younger people currently paying for seniors’ benefits are more likely to be in the bottom of the income distribution. In this way, Social Security redistributes benefits to higher- from lower-income Americans. Lifting taxes would make this inequality even worse.Besides, seniors are already getting more in Social Security benefits than they paid in. According to an Urban Institute calculation, a married couple with two average earners retiring in 2025 will receive $831,000 in benefits over their lifetime but will have paid “only” $783,000 into the program — all adjusted into net present value. Some seniors could absolutely absorb a reform in benefits. Lifting taxes on these relatively well-to-do seniors instead is a slap in the face for younger and poorer current working Americans.The bottom line is that exempting Social Security benefits from taxation is a bad idea. So why propose it? Because politicians get rewarded when they promise to enrich voters, including showering them with cash. A new paper by the American Enterprise Institute’s Stan Veuger, University of California, San Diego’s Jeffrey Clemens, and University of California, Los Angeles’s Julia Payson looks at pandemic-era spending and shows that politicians are rewarded at the ballot box for doling out deficit-financed benefits and making future generations pay the price.Whatever role voters play in this, the greatest threat to Social Security isn’t the current tax structure — it’s willful political denial of the program’s impending insolvency. By addressing these challenges head-on sooner rather than later, we can preserve the integrity of the system and uphold the intergenerational compact that has long been at the heart of Social Security. The time for meaningful reform is now, before the financial realities force far more drastic and painful measures in the future.Creators.com

Trump’s Plan To Remove Taxes on Social Security Will Backfire Unless It’s Paired With Reforms

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