John Tlumacki/The Boston Globe via Getty Images

Social Security: Testing the Third Rail


tim ferguson, the former editor of Forbes’s Asia edition, writes about business and economics.

Published August 31, 2020


If a blue wave sweeps through Washington this November, a handful of fiscal initiatives are bound to be high on the agenda. The first order of business will presumably be more financial aid designed to spare middle- and low-income earners much of the pain of what promises to be a slow economic recovery. Moreover, sooner rather than later, we can expect assaults on the Trump corporate tax cut that never delivered on the promised effect to boost domestic investment, along with broader efforts to tilt taxes back toward high-income brackets.

Away from such political sound and fury, however, I believe there will be a quiet if nonetheless substantive push for redress on more sacred ground: Social Security. Since the last Republican feint at privatization for future beneficiaries in George W. Bush’s second term, the nation’s favorite social-welfare program has been off limits for real partisan conflict. But the portal to change, this time favored by the left rather than the right, has been pried open by mainstream Democrats including House Social Security subcommittee chairman Richard Larson of Connecticut and economists Larry Summers and Jason Furman. They are calling for enhanced benefits, paid for with taxes on higher earners.

Stealth Reform

Who at this point would dare touch America’s clichéd third rail of social policy? And why now?

A model for the change I foresee — one that could take place with less than total ideological war — is the evolution of the Medicare program over the past quarter-century. Medicare began in 1965 as a largely insurance-oriented scheme for the elderly, closer to what Social Security remains. Both Medicare and Social Security collect payroll taxes from both employers and employees to cover future benefits for those who’ve paid. But, while both are progressive, the financing side of today’s Medicare is far more costly for higher earners — a reality, it is safe to say, most people don’t understand.

The ground started shifting in 1993, as the new Clinton White House went looking for ways to beef up government revenues, including the finances of Medicare. Most attention focused on an increase in marginal tax rates for the top brackets. Republicans, then still a minority in Congress, fought the “biggest tax increase in history” mightily and only narrowly lost. As part of the package, the cap on wages subject to a 1.45 percentage point employee payroll tax — then $135,000 — was removed, even as the one for Social Security remained. (Self-employed individuals and partnerships must pay the employer’s side as well as the beneficiary’s.) But Social Security was not entirely spared in the effort to eliminate the system’s future shortfalls: the law increased the portion of Social Security benefits subject to tax for the better off.

Although, as noted, some in the GOP did protest the Medicare and Social Security changes, it is notable that they have never returned to that fight. Even as subsequent Republican Congresses, entranced by supply-side nostrums, peeled back personal and corporate income taxes, they did not undo the 1993 reforms or subsequent redistributions in the older-age programs.

A second bite of the apple came in 2003, when George W. Bush teamed with Democrats to enact a new prescription-drug benefit, Medicare Part D. Though long in the sights of centrists, the drug coverage was still too much government for many in the GOP congressional majority. To pay for it, Bush and friends raised Medicare premiums, weighted by income, for basic medical coverage as well as for access to the drug benefit.

Those premium surcharges — known in Medicare-speak as IRMAA (income-related monthly adjustment amounts) — now begin at $87,000 annual income and top out for singles at $500,000. The latest annual report of the system’s trustees estimates that these charges have brought in $55 billion through 2019.

According to Joseph Antos, a health care policy specialist at the American Enterprise Institute, imposition of the charges was more an accounting exercise to settle the stomachs of GOP deficit-fretters than a deliberate effort at redistribution. “Scoring” by the Congressional Budget Office (where Antos had just served) steered prudent Republicans toward projected revenue that would offset the cost of the new drug benefit. The result turned out to be more progressive than anyone (except perhaps the cagey Ted Kennedy on the Democrats’ side) imagined.

The third significant tilt toward leveling came from the Affordable Care Act. While Obamacare was fought vociferously by the GOP on multiple fronts, the greatest heat was directed at minimum coverage and mandates to participate. Far less ideological energy was focused on two additional revenue components linked to Medicare: a 0.9 percentage point payroll-tax surcharge for those reporting more than $200,000 in wages and a 3.8 percentage point addition to the rate on investment income for those same higher earners. 

Since the last Republican feint at privatization for future beneficiaries in George W. Bush’s second term, the nation’s favorite social-welfare program has been off limits for real partisan conflict. But the portal to change, this time favored by the left rather than the right, has been pried open by mainstream Democrats.

Some in the tall cotton haven’t given up hope of jettisoning the surcharges — which would happen automatically if the Trump administration has its way in the Supreme Court and wipes out Obamacare in its entirety. But if the Affordable Care Act does survive the legal challenge, it’s not likely that Congress will give up the revenue.

Even with these enhancements, much of Medicare — especially the Part A hospital insurance that is financed completely by payroll taxes — is still in precarious budget shape. And the urgency extends to Social Security Disability Insurance and ultimately to its basic old-age monthly benefit checks. Another rescue attempt is coming after 2020, and there’s not going to be much appetite to make the working class pay for it, no matter who wins the election.

Social Security’s Turn?

That points to the IRMAA paying pool — either as heftier contributors or as diminished recipients. The process will be initiated by the trustees of the systems and, though following a similar congressional path to enactment, can be distanced from the main tax fireworks of 2021 and beyond. The big noises will be made over the personal and corporate income rates and perhaps over a wealth levy and, conceivably, funding for a Medicare-for-All. As all the important players are doubtless hoping, Social Security “fixes” will hide in plain sight.

Reflecting the new tenor of the times, Elizabeth Warren’s presidential candidacy revealed the approach a major redistribution could take. But a more basic shift, to lift the payroll-tax cap for Social Security (now at $137,700), has been in the hopper for more than 20 years. Whatever the remaining resistance, few in Washington would hold strictly to an “earned benefit” — which has always been only a convenient myth anyway.

As with changes made to Medicare, changes looming for Social Security will tend toward complicated alterations to the status quo, including how the benefits of the two programs themselves combine. (There’s a whole literature on the “hold harmless” provision that’s supposed to shield Medicare Part B recipients from increased deductions out of their Social Security checks; just know that sometimes certain stars align wrong.) But there’s plenty of room to give bigger — or earlier — benefits to those who’ve had lesser-paying or more manual jobs, as a sweetener. With a program as big as the retirement income entitlement, even modest changes to means-testing can add up to big dollars.

If the new Congress doesn’t want both to lift Social Security’s payroll-tax cap AND put a rate surcharge on the top brackets, it could instead hit the affluent at the other end — for example, by making the full benefit check subject to tax for those with high incomes, whereas now only 85 percent is taxed. (Bet you didn’t know that figure, and thus probably wouldn’t notice if it went up.) The 3.8 percentage point tax on investment income under Obamacare is the real foot in the door, however; a similar levy for Social Security, or simply sweeping investment income into the payroll-tax pot, would yield tens of billions.

Getting that piece of it past Wall Street’s lobbyists (who are comfortable working both sides of the aisle) would take some serious grassroots organizing. Democrats on the Senate Finance Committee, the tax pipeline, are historically slow to work the barricades. Joseph Minarik of the Conference Board’s Committee for Economic Development, who long worked with the party’s fiscal hawks, ticks off several hurdles to taxing investment income just like payroll income. At very least, it would create a whole new army of tax specialists searching for routes around the law.

It’s worth noting, too, that the relatively affluent elderly are famously sensitive to any tinkering with their benefits and obligations. In 1989, a crowd of seniors hassled Rep. Dan Rostenkowski, then chair of the Ways & Means Committee, over a progressive-leaning Medicare expansion he’d helped to pass the year before because it would have been, in part, paid for by the beneficiaries. The new Congress pared it back.

• • •

Yes, even in a woke Washington there will always be someone to explain to the comfortable that somebody’s trying to sneak a tax increase or a benefit cut past them. But this will be an interesting moment if the Democrats have a big year at the polls in 2020. So much firepower will be spent on the ideological front lines in 2021 that there’ll be cover for plenty of rear-guard movement. Social Security and Medicare need revenue, and getting it from the rich may prove to be the path of least resistance.

main topic: Social Safety Net
related topics: Tax Policy