Taxing the rich is no silver bullet for saving Social Security
“Make the very wealthy begin to pay their fair share.” That was President Biden’s response when asked at last month’s presidential debate what he would do to address the looming insolvency of the Social Security trust fund. Combined with his opposition to benefit reductions of any kind, the implication is that Social Security’s finances should be stabilized by taxing the rich alone. In practice, this tax-only approach is like trying to patch a cracking dam with duct tape. Indeed, rather than solving the problem, it sets the stage for the very same political gridlock that has prevented Congress from acting on Social Security reform for the past four decades.
Social Security is primarily financed by a 12.4 percent payroll tax on the wages of American workers. The tax applies to the first $168,600 of wages and generates over $1 trillion in revenue annually, which is equal to one-quarter of total federal tax collections. Proceeds from the tax are used to pay retirees, and in years when benefit payments exceed tax revenues, the difference is withdrawn from the Social Security trust fund. Currently, the trust fund stands at nearly $2.8 trillion, but Social Security is projected to run deficits moving forward that will drive the trust fund balance to zero over the next decade and cause an automatic benefit cut of approximately 20 percent.
To avoid the benefit cut to millions of seniors and stabilize Social Security over the long term, President Biden has proposed increasing revenues by applying the payroll tax to wages above $400,000. While some could argue that the rich could afford to pay more in taxes, the tax increase would only delay the inevitable shortage. According to the Social Security chief actuary, soaking the rich through proposals like this would push back insolvency by 10 years and would solve just 60 percent of the long-term actuarial deficit. In other words, this tax increase alone would not be enough.
In theory there are other taxes that could be adjusted, such as raising the payroll tax rate or by expanding the application of an ObamaCare tax on investment earnings, but tax increases on this massive scale would harm economic growth and face strong resistance from conservatives in Congress. All of which points to continued inaction and delay on an issue that gets more difficult to solve with each passing year.
More broadly, tax-the-rich policies are regularly floated as a catch-all solution to many progressive policy priorities. But there’s a limit on how high taxes can practically increase and the resources needed to fund a Social Security fix represents a large piece of that perceived capacity.
The optimistic view on Biden’s proposal is that he’s staking out a position that could be modified through negotiation. However, if history repeats itself then those negotiations will never occur because Democrats and Republicans avoid the issue year after year for political benefit. Instead, proposals like Biden’s—not to mention the new Republican Party plan to fix Social Security by restoring “economic stability”—simply provide Americans with a false impression of what is actually necessary to solve the Social Security challenge. The result is persistent inaction and the real prospects of a 20 percent benefit cut that will impact all seniors in the next 10 years.
As a first step for avoiding this predictable outcome, it’s time for our leaders to move beyond the soundbite proposals and start being honest with the American people about the scope of the problem and articulating the real tradeoffs and compromises required to maintain Social Security for generations to come.
Chris McIsaac is a fellow with the R Street Institute’s governance program