Veronique De Rugy

Social Security is struggling with enormous deficits. It is insolvent. No one will be able to escape that reality for the next decade – despite decades of politically opportunistic denial. But today both presidential candidates, Vice President Kamala Harris and former President Donald Trump, announced they will not touch the program. In fact, Trump wants to make it even more insolvent by increasing the taxes that retirees pay on their benefits.

Don’t get me wrong, I’m all for lower tax rates. I also believe that the current tax structure on Social Security provides a huge incentive for retirees who may want to go back to work but aren’t. And these kinds of work disincentives in the tax code are bad. While lower Social Security taxes might encourage some retirees to go back to work, if that’s not accompanied by Social Security reform, that will in turn cause more dramatic problems, which neither Trump nor Harris are willing to acknowledge.

Social Security is in a big financial mess anyway. Current benefit taxes bring in about $87 billion in revenue each year, in addition to payroll tax revenue. Yet Social Security is insolvent. Currently, Social Security’s main fund is projected to be empty by 2033. According to the Committee for a Responsible Budget, exempting Social Security benefits from taxation would bring that date forward to 2032 (and the Medicare trust fund would also be empty six years earlier).

Why should you care? Because the law requires that in the event of bankruptcy, Social Security benefits must be cut by 23% unless Congress reforms the program.

If Congress and the administration decide to keep the benefits and fund them with borrowed money, the U.S. Treasury will have to borrow $39 trillion over 30 years (on top of the $77 trillion it borrowed for Medicare). This, of course, is on top of the already large deficits and debt we have accumulated.

Without taxes on welfare, this deficit will be even greater. It should be remembered that bankruptcies are the real reason for the introduction of these taxes. The decision to tax welfare was not made until 1983, when the program was already in financial trouble.

Additional taxes and an increase in payroll taxes were seen as necessary means to maintain the program’s solvency.

However, Congress should have reformed the program more thoroughly at the time. The original conception of the program envisaged bankruptcy. But Congress chose a more politically convenient and less responsible path. Today we are paying the price for this political cowardice.

Raising taxes on social security benefits would also be very unfair. Contrary to popular 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 income has grown four times faster than that of the average worker since 1980.” By comparison, younger people who currently receive pension benefits tend to be in lower income groups. In this way, Social Security redistributes benefits from low-income to higher-income Americans. Raising taxes would exacerbate this inequality.

In addition, retirees already receive more Social Security benefits than they paid in. According to a calculation by the Urban Institute, a married couple with two average earners retiring in 2025 will receive $831,000 in benefits over their lifetime, but “only” $783,000 was invested in the program – all adjusted for net present value.

The bottom line is that some seniors could certainly cope with welfare reform. A tax increase for these relatively wealthy seniors would be a slap in the face to younger and poorer workers.

The bottom line is that exempting Social Security benefits from taxation is a bad idea. So why is it being proposed? Because politicians are rewarded for promising to enrich voters, which includes showering them with money. A new paper by Stan Veuger of the American Enterprise Institute, Jeffrey Clemens of the University of California, San Diego, and Julia Payson of the University of California, Los Angeles, examines spending during the pandemic and shows that politicians are being rewarded at the ballot box for doling out deficit-funded benefits and making future generations pay for them.

Whatever role voters play in this mess, the biggest threat to Social Security is not the current tax structure but the deliberate political denial of the program’s looming insolvency. By addressing these challenges head-on sooner rather than later, we can preserve the integrity of the system and uphold the intergenerational contract that has long been at the heart of Social Security.

Now is the time for meaningful reforms before financial reality forces even more drastic and painful measures in the future.

EDITOR’S NOTE: Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research associate at the Mercatus Center at George Mason University. For more information about Veronique de Rugy and contributions from other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.