Adding to Social Insecurity House Democrats propose to increase the entitlement burden.
https://www.wsj.com/articles/adding-to-social-insecurity-11551650108
Memo to young workers: The Democrats you recently elected want to raise Social Security benefits for retirees while taxing you more to pay for it. Too bad they didn’t tell you about this last year when they were running against Donald Trump.
Among the many tax increases Democrats are now pushing is the Social Security 2100 Act sponsored by John Larson of House Ways and Means. The plan would raise average benefits by 2% and ties cost-of-living raises to a highly generous and experimental measure of inflation for the elderly known as CPI-E. The payroll tax rate for Social Security would rise steadily over two decades to 14.8% from 12.4% for all workers, and Democrats would also apply the tax to income above $400,000.
The political pitch is that this would make Social Security more financially secure, but it would do the opposite. Social Security financing is increasingly stretched as fewer workers are available to support each baby boomer retiree. Social Security’s trustees reported in 2018 that filling the looming financing gap would require an “immediate and permanent” payroll tax increase to 15.18%, a 17% benefit cut, or some mix of both.
The proposal would also further tilt government spending to the elderly, who in general are doing well. The Congressional Budget Office reported recently that government outlays on those 65 and older are 40% of the $3.8 trillion in federal spending (excluding interest on the federal debt), up from 35% in 2005. This is projected to rise as the population ages to 50% of spending in 2029, which would be more than 10% of the U.S. economy.
This is before the new benefits that Democrats want to add. Spending more on seniors means less for other priorities such as defense (now down to a historically low 3% of GDP), public works or education.
Democrats are also sneaky in the way they lift the income cap on Social Security taxes. The Social Security tax currently applies only on income up to $132,900, an amount that rises each year with inflation. But the new payroll tax on income above $400,000 isn’t indexed to inflation, which means the tax would ensnare ever more taxpayers over time. This isn’t a drafting error. Democrats claim they only want to tax the rich but they know there aren’t enough rich to finance their redistribution plans. They want their hooks deeper into the middle class without middle-class voters figuring that out.
The new 14.8% Social Security payroll-tax rate would come on top of the 37% federal income-tax rate, plus 2.9% for Medicare today (split between employer and employee), plus the 0.9% ObamaCare surcharge on income above $200,000 and 3.8% surcharge on investment income. Add state taxes, and don’t forget Rep. Alexandria Ocasio-Cortez’s proposal to raise the top income tax rate to 70%.
As Democrats mobilize to sell all this, you’ll hear a lot about a “retirement crisis.” Don’t believe it. People should save more, but the current generation of seniors is the most financially secure in history. They’re receiving more generous benefits from Social Security than they’ve earned because of an inflation formula that increases benefits at a faster rate than actual prices as measured by chained-CPI, which considers how consumers substitute goods when prices increase.
Andrew Biggs of the American Enterprise Institute recently told Congress that contributions to retirement plans increased to 8.7% of pay in 2015 from 5.8% in 1975. Among households earning more than $25,000, 95% have access to an employer-sponsored retirement plan. Median incomes for retirees are growing. Government data show a low and declining poverty rate for seniors.
As lifespans increase, the U.S. needs more working seniors contributing to the economy. Yet higher Social Security benefits can induce earlier retirement if people think they don’t have to save as much. Higher marginal tax rates on Social Security benefits and income also discourage healthy seniors from working.
Some form of Mr. Larson’s bill is likely to move through Ways and Means and the House this year. Democrats want to attract the votes of seniors who have been trending Republican. The bill will die in the GOP Senate this Congress, but watch out in 2021. Millennials may want to consider that they could pay more than half of everything they earn to the government for most of their working lives.
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