Trump’s Payroll Tax Cut, The Democrats’ Social Security Expansion, And Having Your Cake And Eating It Too
Should Social Security be a social-assistance program, helping the poor who can’t save for retirement on their own, or a social insurance program in which workers pay in and receive benefits in proportion to their income? Or should it be an intentional income-redistribution program from the wealthy to the middle-class?
Should Social Security be funded in advance, with each generation paying into the fund and then, at retirement, spending down (collectively, by cohort, or individually) the funds that were built up? Or should Social Security be a simple pay-as-you-go system, in which tax money (or borrowing, or money-printing) pays for benefits, simple as that?
We once collectively had a myth (that is, in the sense of a foundational story) that Social Security was both advance-funded and “true” social insurance (rather than welfare/redistribution). Now we’re likewise collectively abandoning both of these elements, even aspirationally.
Yesterday, I outlined vice-presidential nominee Kamala Harris’s plan for Social Security: substantial benefit increases paired with a phase-out of the earnings ceiling and the taxation of investment income (at least for higher income workers). Biden’s own platform is less ambitious in some respects, but also less detailed — for instance, it lacks the 15% benefit hike included in legislation Harris sponsored, and is vaguer with respect to the additional taxes and could mean as much as increasing the tax rates for higher earners, rather than merely applying taxes to more income.
Clearly this abandons the principle of social insurance that, by and large, one pays into and receives benefits from the system in rough relationship to one’s income; instead, it calls for the rich to “pay their fair share,” with the expectation that what’s “fair” is to subsidize the rest of us. It also acknowledges the reality that our system is simply pay-as-you-go, and, to the degree that an expanded Social Security benefit decreases workers’ retirement savings (or reduces the degree to which savings might otherwise have expanded to fill in the gap left by the demise of employer-sponsored traditional pension plans), it increases the pay-as-you-go-ness of the retirement system as a whole.
But let’s face it — you can be sure you’ll still hear plenty of claims that workers have “earned” their benefits fair-and-square by paying their FICA taxes.
Hoo-boy, don’t get me started on Trump.
Here’s the latest, from his press briefing yesterday:
“When we win the election — when I win the election, I’m going to completely and totally forgive all deferred payroll taxes without in any way, shape, or form hurting Social Security. That money is going to come from the General Fund. We’re not going to touch Social Security. I said from day one that we’re going to protect Social Security, and we’re going to protect our people. . . .
“And the beauty of that is that it really incentivizes companies, and — because it’s both a company cut and a — a employee cut. . . .
“And the payroll tax — we’ll be terminating the payroll tax after I, hopefully, get elected. We’ll be terminating the payroll tax, so that will mean anywhere from $5,000 to even more per family, and also great for businesses and great for jobs. . . .
“Q How do you fund it from the General Fund, when the General Fund just incurred a debt of $2.8 trillion?
“THE PRESIDENT: You’re right, but we’re going to have tremendous growth. We have tremendous growth.”
Is Trump out to destroy Social Security? He may be delusional in his belief that “tremendous growth” will mean that the federal government can absorb the expense of funding Social Security benefit checks (or, let’s not forget, Medicare Part A) without the FICA taxes coming in, but fundamentally he’s making the same shift as the “scrap the cap” advocates are calling for: a shift from “you get what you earn” to a government benefits program. (Whether he realizes this is another question.)
What’s more, here’s a (paraphrased) argument laid out by “Son of Spengler” (@spengjr) on twitter: the current legal structure of the program means that Social Security cannot legally pay out benefits except for money from the Trust Fund. When the Trust Fund runs dry, benefits will be paid only to the extent that FICA tax money that’s being immediately collected at the time, can fund them; somehow or another, if no changes are made in the meantime, administrators will have to cut 20% of benefits outlays. But if Trump engineers legislation that says, “there’s no FICA tax and general revenues fill in the gap,” this sets the stage for gap-filling not merely for the lack of a FICA tax but also for the gap between the hypothetical no-longer-existing FICA tax and the costs of the program after the Trust Fund is exhausted.
Far from being a death blow, this achieves the Democrats’/Social Security Expansion-ists’ goals. As Son of Spengler writes, “Far from Democrats’ false cries about Trump ‘undermining’ the program, Trump’s precedent gives them precisely what they want – unsustainable benefits with no responsibility to find a way to pay for them. The program becomes immediately solvent, at the expense of the general fund.”
And, finally, I have called for a multi-tiered retirement system, in which Social Security is replaced by a pairing of a basic income funded on a pay-as-you-go basis and true funded retirement savings accounts to provide income above this basic minimum. (It was, after all, the subject of my second article on this platform, in which I provide more details about this proposal.) As the Democrats have, individually and collectively, coalesced around a Social Security expansion that would include a minimum benefit of 125% of poverty with 30 years of work history, I realize that, with this backdrop, it’s harder to make the case for the sort of reform I envision — that is, they propose the same “basic” benefit concept as I do (with the largest difference being their work history requirement) but without making any further fundamental changes in the system — hence, “having your cake and eating it, too.”
But it does matter. Middle-class Americans should not depend on the government to provide their “replacement rate” retirement income, and all the more so should not believe that this can happen by means of the rich “paying their fair share.” The government has an important role to play in providing a legal structure for savings and converting assets into income in retirement, and quite possibly, even quite likely in actually mandating savings, but this is fundamentally an entirely different role than simply cutting checks.
As always, you’re invited to comment at JaneTheActuary.com!