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Why Van Hollen’s Social Security ‘fix’ won’t work

Congress raised the payroll taxes that provide the bulk of Social Security revenue in 1983. (Sign up for our free video newsletter here http://bit.ly/2n6VKPR)

More help is on the way for Social Security if Sen. Chris Van Hollen, the Maryland Democrat, has his way. He introduced the Strengthen Social Security by Taxing Dynastic Wealth Act, which would turn the estate tax into a major source of funds for the program.

His plan would return the estate tax to 2009 levels starting in 2020 — depositing all of the revenues from this tax into the Social Security Trust Fund. According to the Social Security Administration, these changes would generate enough cash to address roughly 20% of the gap between projected revenue and expense over the next 75 years.

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For those of us who are apt to need the program over time, that sounds like a good start. Unfortunately, this concept will have a very bad end for everyone.

There are two serious misconceptions about this legislation. First, the improvement in the system’s finances doesn’t come just from new revenue collected from the 1%-ers of the nation as advertised by supporters. The bulk of the salvation comes from the diversion of existing estate tax revenue — money that already comes from Buffetts, Gateses or Bezoses and their ilk — to Social Security. As a result, these changes would add about $260 billion to the national debt over just the next decade.

Second, most of the new money is coming from people who have earned a lot less than those titans of commerce. In fact, the largest segment of salvation draws most of its money from the estates of middle class Americans in the distant future. The thresholds that trigger the levy are fixed, so inflation is apt to push average people into the tax over time. To illustrate the impact, if inflation unfolds as the trustees believe, people who have an estate of less than $500,000 will have to pay part of this tax.

To see how this design plays out, we need only look to another feature of Social Security — the taxation of benefits. Initially, this levy hit less than 10% of retirees, most of whom were genuinely wealthy. Today, 56% of filers who collect benefits are subject to some of the highest marginal tax rates in the entire tax code. These people aren’t wealthy; some of them live just above poverty.

This proposed legislation isn’t terribly different from Congress writing a check to Social Security for another $3 trillion with money borrowed from our kids. For that princely sum, we would get a projected three extra years of solvency, to 2038. This isn’t soaking the rich; it is pillaging our progeny — something at which we are growing disturbingly comfortable.

Maybe three years sounds like a lot, but it comes at a high price. President Franklin D. Roosevelt rejected the idea of public subsidies for the program. He knew that such revenue would amount to an annual battle pitting the needs of the elderly against other priorities of the day. This year, Congress wants to use the Estate Tax for Social Security; next year it might be infrastructure, education or debt reduction. This policy virtually ensures that Social Security becomes an annual target of the deficit hawks in Congress.

FDR foresaw the problem. He knew that Social Security would be a very difficult sell in Congress as a use of public money. Lawmakers would have justify using public money on a program that does not serve all Americans equally. In fact, one-fifth of our poorest seniors do not even qualify for benefits at all. Moreover, public money introduces a question of fairness when spouses get half of what their partners collect. The reality is that this legislation would simply add trillions of dollars of debt to our children’s load so that the program could continue to provide a $50,000 or more in stipend to seniors who are the 1%-ers that we seek to soak.

This legislation isn’t saving Social Security, and it isn’t taxing the Buffetts, Gates and Bezos of the world. It recycles the classic tax and spend policies of Washington dressed as a morally justified, sensible populist reform.

Brenton Smith (joetheeconomist@gmail.com) writes on the issue of Social Security with work appearing in Barrons, Forbes, MarketWatch, TheHill.com, The Baltimore Sun, and other nationally branded media.

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