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Written by: Eugene Steuerle
Republican presidential nominee Donald Trump vows he “will not cut one cent from Social Security and Medicare” and that “Seniors should not pay taxes on Social Security…and they won’t.”
But why do seniors pay taxes on Social Security? The answer uncovers the secret behind both political parties' promises to protect seniors and their benefits: Protection has a price, and somebody will have to pay it.
The fiscal facts
Everybody can understand the basics of the federal government’s income statement.
The costs of Social Security and Medicare Part A (hospital insurance) benefits increasingly exceed the revenues deposited into their trust funds. Both programs’ benefits are set to grow substantially over time, so more revenue must be found, the growth rate of spending cut, or both.
Congress can let the rest of the budget absorb the trust funds’ hemorrhaging, primarily by adding those deficits to the ones in the non-trust fund part of the budget, financed out of general revenues like the income tax. But that does nothing to protect future taxpayers from paying ever more for growing federal debt and interest payments.
A little history
Trump’s proposal to turn more general revenues over to programs for elderly Americans is not new. When Congress enacted Social Security in 1935, roughly one-half of elderly people were considered poor. The average life expectancy was much shorter than today (61 for white men, 65 for white women, 51.3 for Black men, and 55.2 for Black women in 1935).
Social Security worked increasingly well to keep elderly Americans out of poverty, and the program grew in popularity. After World War II, Democrats and Republicans competed to support it, enacting multiple Social Security and Medicare expansions from the 1950s through the 1970s.
Medicare, enacted in 1965, aimed to meet the needs of those many elderly Americans who did not have health insurance. Its costs, however, also continually grew much faster than the growth in the nation’s income, partly due to the lack of significant limits on new goods and services at prices often set by the private sector.
By the 1970s, Congress made much of the growth in Social Security automatic, expecting it could replace lawmakers’ competitive zeal to increase benefits (and costs) with periodic legislation.
A big fiscal problem with a partial fiscal solution
The competition did slow, partly because by the late 1970s, the Social Security trust fund was projected to run out of money. Congress enacted some tax increases and benefit cuts in 1983, offering Social Security a temporary, multi-decade financial reprieve.
That’s when Congress first taxed Social Security benefits and directed the revenue to the Social Security trust fund. The idea: Higher-income Social Security beneficiaries would be part of the solution to an underfunded system.
Later legislation would increase the taxation of benefits a bit more to temporarily shore up the Medicare trust fund for Medicare Part A. (The rest of Medicare is paid for out of general revenues, with its own fast-growing spending.)
But both programs still schedule most new retirees’ lifetime benefits to grow faster than the lifetime taxes they contribute to the trust funds. That alone would continue the hemorrhaging.
However, now the large baby boom generation is retiring, the birth rate is declining, and there are fewer taxpayers to support each Social Security and Medicare beneficiary. Failure to address the growing shortfall in revenues relative to growing levels of spending would substantially add to elderly poverty.
What can the government do?
Social Security is almost 90 years old. Even though elderly Americans, by some measures, are less likely to fall into poverty than non-elderly Americans, the competition to protect and even expand their programs is as vibrant as ever.
Politicians, by design, want to promise more to everyone. But they are not magicians. To keep a promise, someone must always pay, one way or the other.
A repeal of taxation of Social Security benefits would primarily benefit the highest-income elderly recipients. Those recipients would now contribute less to the solution to an underfunded system. What or who would have to make up the difference?
The federal government’s income statement leaves only three possible options:
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Congress could cut other programs (spending on which has already declined as a share of our budget and national income, and most of which have no built-in automatic growth, as do Social Security and Medicare).
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Congress could raise other taxes on everyone, including the elderly, right away.
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Congress could run even higher deficits and then require people tomorrow to pay off the rising interest costs and debt.
The answer is likely option 3: Tomorrow’s taxpayers, mainly today’s non-elderly, will cough up the money. That’s not a promise; it’s just history.
*Largely reproduced from Tax Vox, September 20, 2024. Posts on Tax Vox are solely the opinion of the authors and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.