Most likely, YOU
But why do seniors pay taxes on Social Security? The answer uncovers the secret behind both political parties’ promises to protect seniors and their benefits: Protection has a price, and somebody will have to pay it.
Everybody can understand the basics of the federal
government’s income statement.
The costs of Social Security and Medicare Part A (hospital insurance)
benefits increasingly exceed the revenues deposited into their trust funds.
Both programs’ benefits are set to grow substantially over time, so more
revenue must be found, the growth rate of spending cut, or both.
Congress can let the rest of the budget absorb the trust
funds’ hemorrhaging, primarily by adding those deficits to the ones in the
non-trust fund part of the budget, financed out of general revenues like the
income tax. But that does nothing to protect future taxpayers from paying ever
more for growing federal debt and interest payments.
History
Trump’s proposal to turn more general revenues over to
programs for elderly Americans is not new. When Congress enacted Social
Security in 1935, roughly one-half of elderly people
were considered poor. The average life expectancy was much
shorter than today (61 for white men, 65 for white women, 51.3 for Black men,
and 55.2 for Black women in 1935).
Social Security worked increasingly well to keep elderly
Americans out of poverty, and the program grew in popularity. After World War II,
Democrats and Republicans competed to support it, enacting multiple Social
Security and Medicare expansions from the 1950s through the 1970s.
Medicare, enacted in 1965, aimed to meet the needs of those
many elderly Americans who did not have health insurance. Its costs, however,
also continually grew much faster than the growth in the nation’s
income, partly due to the lack of significant limits on new goods
and services at prices often set by the private sector.
By the 1970s, Congress made much of the growth in Social
Security automatic, expecting it could replace lawmakers’ competitive zeal to
increase benefits (and costs) with periodic legislation.
Big problem, partial solution
The competition did slow, partly because by the late 1970s,
the Social Security trust fund was projected to run out of money. Congress
enacted some tax increases and benefit cuts in 1983, offering Social Security a
temporary, multi-decade financial reprieve.
That’s when Congress first taxed Social Security benefits
and directed the revenue to the Social Security trust fund. The idea:
Higher-income Social Security beneficiaries would be part of the solution to an
underfunded system.
Later legislation would increase the taxation of benefits a
bit more to temporarily shore up the Medicare trust fund for Medicare Part A.
(The rest of Medicare is paid for out of general revenues, with its own
fast-growing spending.)
But both programs still schedule most new retirees’ lifetime benefits to grow faster than the lifetime
taxes they contribute to the trust funds. That alone would
continue the hemorrhaging.
However, now the large baby boom generation is retiring, the
birth rate is declining, and there are fewer taxpayers to support each Social
Security and Medicare beneficiary. Failure to address the growing shortfall in
revenues relative to growing levels of spending would substantially add to elderly poverty.
What can government do?
Social Security is almost 90 years old. Even though elderly
Americans, by some measures, are less likely to fall into
poverty than non-elderly Americans, the competition to protect and even expand
their programs is as vibrant as ever.
Politicians, by design, want to promise more to everyone. But they are not
magicians. To keep a promise, someone must always pay, one way or the other.
A repeal of taxation of Social Security benefits would
primarily benefit the highest-income elderly recipients. Those
recipients would now contribute less to the solution to an underfunded system.
What or who would have to make up the difference?
Three options
The federal government’s income statement leaves only three
possible options:
- Congress
could cut other programs (spending on which has already declined as a
share of our budget and national income, and most of which have no
built-in automatic growth, as do Social Security and Medicare).
- Congress
could raise other taxes on everyone, including the elderly, right away.
- Congress
could run even higher deficits and then require people tomorrow to pay off
the rising interest costs and debt.
The answer is likely option 3: Tomorrow’s taxpayers, mainly
today’s non-elderly, will cough up the money. That’s not a promise; it’s just
history.
Eugene Steuerle is an Institute fellow and the Richard B. Fisher chair at the Urban Institute. He was the original organizer of the Reagan Administration’s tax reform efforts and in 1987-89 deputy assistant Treasury secretary for Tax Analysis. He is a past president of the National Tax Association and the author of 18 books.