Sanders’s latest shot in the Social Security wars could wound us all

This piece is best described as everything you need to know about Senator Bernie Sanders’ (I-Vt.) new flawed Social Security proposal, and why no sane American should love it.

His proposed legislation, the Social Security Expansion Act, calculated by Stephen Goss, the Social Security’s chief actuary, would make Social Security solvent for the next 75 years by massively increasing taxes by about $4.8 trillion over the next 10 years US Dollar Increases While Modestly Rising Benefits.

But according to a more realistic assessment of the program’s finances by the Congressional Budget Office (CBO), even at these extreme levels, these tax increases would be just enough to balance the program with no room for benefit increases.

Furthermore, this comparison of projected earnings to the shortfall does not fully account for the negative impact of higher taxes on labor and capital in the economy. It would depress wages, raise the cost of capital, and reduce national income, all calculations of economic dynamics that the staff of the CBO and the Joint Committee on Taxation (JCT) do more expertly than the Social Security actuary.

As a further comment on the predicament of our finances as a whole, these massive tax hikes bordering on, or even beyond, economic and political plausibility are only enough for the sustainability of one program – Social Security – if you leave out the rest of the underfunded and overpromised pension and welfare programs : Medicare, Medicaid, health insurance exchange subsidies, veterans’ benefits, student loans, meal stamps, the Supplemental Security Income for people with disabilities, and so on.

The proposed legislation would introduce the combined Old Age, Survivors and Disability Insurance (the official term for Social Security) payroll tax rate of 12.4 percent on earnings over $250,000, effective 2024. It would tax all income once the applicable statutory taxable maximum of $160,200 reached $250,000 through inflation, but no benefit would accrue on income above $250,000. This represents a reduction in benefits compared to current law, as such earnings would not qualify for benefits under the proposal, whereas current law would. The actuary estimates that the current statutory tax ceiling would hit $250,000 in 2035, but given the actuary’s gross underestimation of inflation trends over the past year, it will almost certainly occur sooner. It should also be noted that $400,000 is now being used as a common middle-class policy demarcation, such as in President Biden’s pledge not to tax anyone earning less than that amount.

The proposal would also impose a separate 12.4 percent tax on capital gains (dividends, interest, capital gains, rent, royalties and passive business income) paid into Social Security trust funds, with unindexed thresholds as in the Affordable Care Act ( ACA), i.e. $200,000 for single parents and $250,000 for married couples applying together. This is in addition to the currently levied 3.8 percent insurance extension tax in the ACA and the additional 0.9 percent Medicare tax on income used by the ACA to also support the Medicare Trust Fund, and the Removed the Medicare payroll tax income cap imposed during the Clinton administration.

Finally, starting in 2024, the Sanders legislation imposes a 16.2 percent net capital gains tax on active S corporation owners (small businesses whose income goes into the owners’ personal taxes) and active limited partners. Of the total tax, 12.4 percentage points would be payable to the Social Security Trust Fund and 3.8 percentage points to the federal general fund. The income limit for this tax would be the same as for passive capital gains.

The Social Security Actuary estimates that these three tax increases would add up to 5.29 percent of the taxable payroll. The CBO estimated last year that the Social Security deficit was 4.9 percent of payrolls. So these taxes would hardly be enough to fill the current hole without paying multiple increases in Social Security benefits for all beneficiaries — rich and poor alike — included in the Sanders legislation. And, as noted above, this is without the likely very negative revenue “haircuts” that the CBO and JCT would make to the dynamic adverse consequences of these massive tax increases for millions of taxpaying individuals and corporations.

In fact, it should be rapidly assessed by the CBO to allow for public discussion as part of overall fiscal policy, and its distributional consequences are estimated using the Social Security Administration’s short-term income model (or MINT), which projects the income of future retirees. It is a more thorough and established model than that used by the actuary.

It is unfortunate that past congresses and governments have rapidly deteriorated the nation’s finances and have even compounded the problem. What’s politically interesting is that Sanders, along with several members of the Senate and House Democrats, is now proposing a solution – albeit a very bad one – to one part of the budget problem – namely Social Security – years before the trust fund’s exhaustion date in 2032 – and others continue to do so ignore them and play political games with them.

But more realistic, accountable, and modernizing reform plans on both the benefits and revenue sides, showing bipartisan political leadership, are needed to resolve Social Security and the larger and growing fiscal crisis in a fair, sensible, and economically productive manner.

Mark J. Warshawsky is a Searle Fellow at the American Enterprise Institute. Previously, he was Assistant Secretary for Pensions and Disability Policy at the Social Security Administration and Assistant Secretary for Economic Policy at the US Treasury Department.