President Trump’s Terrible Social Security Idea

By Veronique de Rugy

Thursday, August 01, 2024

 

Charlie Cooke is 100 percent right about President Trump’s proposal to lift taxes on Social Security benefits. It’s a bad idea, even if voters will love it.

 

It’s one thing for Trump to claim that he doesn’t want to reform Social Security and Medicare, knowing that it will have to happen anyway. He’s simply, if irresponsibly, avoiding the political cost of telling the American people the truth about what is unavoidable. But it’s a whole other thing to multiply this irresponsibility with this new proposal.

 

Exempting Social Security benefits from taxation will further increase the insolvency of Social Security. Since these tax receipts also help fund the Social Security and Medicare Hospital Insurance (HI) trust funds, the Committee for Responsible Budget calculates that the move would “advance the insolvency date of Social Security’s retirement trust fund by over one year,” and “advance the insolvency date of the Medicare HI trust fund by six years.”

 

Adoption of the proposal would also be regressive. Benefits are currently taxed in a progressive way. The taxation was expanded in 1993 under the Clinton administration allowing for up to 85 percent of benefits to be taxable for higher-income beneficiaries (a vague estimate for the benefits that higher-income seniors haven’t already been taxed on).

 

It is also a bad thing from an intergenerational fairness perspective. This would grant an additional benefit to the older generations who are overrepresented in the top income quintile, resulting in a bigger burden falling on younger generations who are overrepresented at the bottom.

 

This would also make it harder to keep inflation low. The decision to tax benefits happened in 1983 on the recommendation from the National Commission on Social Security Reform, also known as the Greenspan Commission. The announcement of the tax change raised the present value of primary surpluses. It complemented the efforts that the Federal Reserve at the time was making to reduce inflation permanently. (The Fed can’t do it alone.) Trump’s proposal will work in reverse. The announcement that benefits won’t be taxed increases the present value of primary deficit in the future relative to how much debt is outstanding today. That news induces bond holders to reevaluate the value of their holdings. If they believe that values will go down, then eventually they will sell bonds, which increases aggregate demand creating inflationary pressure.

 

I hope that Trump drops this idea. I hate taxes as much as the next person — indeed, maybe more so. But tax breaks without spending reforms are plain irresponsible, especially in light of our growing debt. The 2024 GOP platform is strong on deregulation and other tax reforms. That’s the surest way to create abundance and help everyone, including seniors.