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 Sen. Bernie Sanders’s (I-Vt.) new flawed Social Security proposal, and why no sensible American should love it. 

His proposed legislation, the Social Security Expansion Act, according to the calculations of Stephen Goss, 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, while modestly increasing benefits. 

Yet, according to a more realistic assessment of the program’s finances, that of the Congressional Budget Office (CBO), these tax increases, even at this extreme level, would just be sufficient to bring the program into balance with no room for benefit increases. 

Moreover, this comparison of projected revenue to shortfall does not fully include the negative effect of the higher taxes on labor and capital in the economy. It would depress wages, increase the cost of capital and reduce national income, all economic dynamics calculations which the CBO and Joint Committee on Taxation (JCT) staff are more expert to perform than the Social Security actuary. 

As a further observation about the difficulty of our overall fiscal situation, these massive tax increases, at the edge of, or even beyond economic and political plausibility, are only sufficient for the sustainability of one program — Social Security — leaving out the rest of the under-financed and over-promised retirement and social welfare programs: Medicare, Medicaid, the health insurance exchange subsidies, Veteran’s care, student loans, food stamps, the Supplemental Security Income for people with disabilities, and so on. 

The proposed legislation would impose the combined Old-Age, Survivors, and Disability Insurance (the official name for Social Security) payroll tax rate of 12.4 percent on earnings above $250,000, effective 2024. It would tax all earnings once the current law taxable maximum of $160,200 reached $250,000 through inflation but no benefits would accrue from earnings above $250,000. This represents a benefit cut compared to current law, as no benefits would be earned on these earnings under the proposal, whereas they would under current law. The actuary estimates that the current law tax maximum would reach $250,000 in 2035, but because the actuary last year severely underestimated inflation trends, it will almost certainly occur sooner. It might also be noted that $400,000 is now used as a common political demarcation of middle-class, for example, in President Biden’s pledge not to raise taxes on people earning less than this amount.

The proposal would also impose a separate 12.4 percent tax on investment income (dividends, interest, capital gains, rent, royalties, and passive business income), contributed to the Social Security Trust Funds, with unindexed thresholds as in the Affordable Care Act (ACA), that is, $200,000 for single filers and $250,000 for a married couple filing jointly. This is in addition to the 3.8 percent tax currently imposed to pay for the insurance expansion in the ACA and the 0.9 percent additional Medicare tax on earnings used by the ACA to also shore up the Medicare Trust Fund, and the removal of the cap on earnings for the Medicare payroll tax, imposed during the Clinton administration.

Finally, the Sanders legislation imposes a 16.2 percent net investment income tax on active S-corporation holders (small companies whose income flows to owners’ personal taxes) and active limited partners, effective 2024. Of the total tax, 12.4 percentage points would be payable to the Social Security Trust Fund and 3.8 percentage points would go to the general fund of the federal government. The earnings threshold for this tax would be the same as for passive investment income.

The Social Security actuary estimates that these three tax increases would produce 5.29 percent of taxable payroll. The CBO last year estimated that the Social Security shortfall was 4.9 percent of payroll. So these taxes would be barely sufficient to fill the current hole, without paying for several Social Security benefit increases for all beneficiaries — rich as well as poor people — which are included in the Sanders legislation. And, as mentioned above, this is without the likely highly negative “haircuts” in revenue that CBO and JCT would make for the dynamic adverse consequences of these massive tax hikes on millions of taxpaying individuals and businesses. 

In fact, it should be quickly scored by the CBO to enable public discussion as part of overall budget policy, and its distributional consequences estimated through the Social Security Administration’s Model of Income in the Near Term (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 administrations have let the nation’s finances deteriorate rapidly, and even added to the problem. It is interesting politically that Sanders, along with several Senate and House Democratic members, is now proposing a solution, albeit a very bad one, years before the Trust Fund exhaustion date of 2032 for part of the budget problem — namely Social Security — which others are continuing to ignore and play political games with. 

But more realistic, responsible and modernizing reform plans on both the benefit and revenue sides showing bipartisan policy leadership are needed to solve Social Security and the larger and growing budget crisis in a fair, reasonable and economically productive manner.

Mark J. Warshawsky is the Searle Fellow at the American Enterprise Institute. He previously served as a deputy commissioner for Retirement and Disability Policy at the Social Security Administration and as assistant secretary for Economic Policy at the U.S. Department of the Treasury.