This article is best described as everything that you need to know about Senator Bernie Sanders‘s (I-Vt.) new flawed Social Security plan and why no sensible American should love it.
Stephen Goss, Social Security’s chief actuary, said that the Social Security plan should be able to pay out for the next 75 years by over the next ten years, increasing taxes by nearly $4.8 trillion while just marginally increasing benefits.
On March 1, 2023, Sen. Bernie Sanders (I-Vt.) speaks to the media during a press conference to discuss the budget proposal from the House Republicans. (Photo: https://thehill.com/)
The Congressional Budget Office (CBO), which has a more realistic view of the program’s finances, says that these tax increases, even at this high level, would just be enough to bring the program into balance, leaving no room for benefit increases.
Also, this comparison of expected revenue to shortfall doesn’t fully take into account how the higher taxes will hurt the economy’s labor and capital. It would make wages go down, raise the cost of capital, and lower the national income.
The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) staffs are better at calculating these effects on economic dynamics than the Social Security plan actuary.
As another sign of how bad our overall financial situation is, these massive tax increases, which are close to or even past the point of economic and political plausibility, are only enough to keep Social Security plan going.
This leaves out the rest of the under-funded and over-promised retirement and social welfare programs, like Medicaid, Medicare, the health insurance exchange subsidies, Veteran’s care, student loans, food stamps, and the Supplemental Nutrition Assistance Program (SNAP).
Sanders’ latest move in Social Security Plan
Starting in 2024, the proposed law would tax earnings over $250,000 at the combined rate of 12.4% for Old-Age, Survivors, and Disability Insurance, which is the official name for Social Security plan.
Once the maximum taxable amount under present legislation was reached, it would tax all income of $160,200 reached $250,000 due to inflation, but earnings above $250,000 wouldn’t get any benefits.
This is a cut in benefits compared to the current law, because these earnings would not count toward benefits under the proposal, but they do under the current law.
The actuary thinks that the current law’s tax maximum will reach $250,000 in 2035, but because he or she was very wrong about inflation trends last year, it’s almost certain that it will happen sooner. People who make less than $400,000 are often considered to be in the middle class.
For example, President Biden has promised not to raise taxes on people who make less than this amount.
The proposal would also put a separate 12.4% tax on investment income, such as rent, royalties, capital gains, dividends, interest, and passive business revenue. This tax would go to the Social Security Trust Funds and have the same unindexed thresholds as the Affordable Care Act (ACA), which are $200,000 for single filers and $250,000 for married couples filing jointly.
This is on top of the 3.8 percent tax that is already in place to pay for the insurance expansion in the ACA, the lifting of the Clinton-era earnings cap on the Medicare payroll tax as well as the 0.9 percent additional Medicare tax on wages that the ACA imposed in order to support the Medicare Trust Fund.
Lastly, the Sanders bill puts a 16.2% net investment income tax on active S-corporation holders (small companies whose income goes to the owners’ personal taxes) and active limited partners starting in 2024. 12.4 percent of the total tax would go to the Social Security Trust Fund, and 3.8 percent would go to the federal government’s general fund. The income limit for this tax would be the same as for income from passive investments.
The actuary for Social Security plan says that these three tax hikes would bring in 5.29 percent of taxable payroll. Last year, the CBO said that the shortfall in Social Security plan was equal to 4.9% of payroll.
So, these taxes would just barely cover the current shortfall, and they wouldn’t be enough to pay for the Sanders plan to raise Social Security plan benefits for everyone, rich and poor, which is also part of the bill.
And, as we’ve already said, this doesn’t include the “haircuts” in revenue that CBO and JCT would likely make because of the negative effects of these huge tax hikes on millions of taxpaying people and businesses.
In fact, it should be scored quickly by the Congressional Budget Office (CBO) so that the public can talk about it as part of overall budget policy. It should also be estimated using the Model of Income in the Near Term from the Social Security Administration (or MINT), which predicts the income of future retirees, how it will affect the distribution of income.
The model used by the actuary is less thorough and less well-known than this one.
It’s too bad that previous Congresses and administrations let the country’s finances get worse quickly and even made the situation worse. It’s interesting from a political standpoint that Sanders and a few other Senate and House Democrats are now proposing a solution, even if it’s a bad one, to part of the budget problem—Social Security—years before the Trust Fund runs out in 2032, while others continue to ignore the issue and use it for political gain.
But in order to address Social Security plan and the broader and worsening budget crisis in a way that is equitable, sensible, and economically beneficial, we need both the benefit and revenue sides more sensible, reasonable, and modernizing reform social security plan that show bipartisan policy leadership.
The American Enterprise Institute’s Searle Fellow is Mark J. Warshawsky. He was the assistant secretary of U.S. Department of the Treasury Economic Policy and the Social Security Administration’s deputy commissioner for retirement and disability policy.
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