Trump’s Wreckage of Social Security and Medicare
Donald Trump’s failed Iran war is at last making the question of his sanity into a first-tier political issue that Republicans can no longer duck. But that’s only the beginning of the political reverberations created by the president’s decaying mental acuity.
As Trump blurted out the other day, he believes that the direct costs of the war combined with his unprecedented request for a 44 percent increase in military spending mean that the federal government can no longer afford Medicare. This is of course preposterous—most of the cost of Medicare is financed by the dedicated payroll taxes that workers pay. Trump has also floated cutting Social Security’s disability program, another form of social insurance with a dedicated stream of tax revenue.
Trump’s rare candor is a perfect expression of his priorities—and is a political gift to Democrats. What complicates the story is that both Medicare and Social Security do face financing shortfalls in the 2030s. This reality can also serve Democrats and jam Republicans, but only if Democrats get their story straight and pursue the right remedies.
Beginning in 2034, Social Security’s trust funds face a projected shortall of 19 percent, according to the latest Trustees’ Report. Under the law, unless Congress acts, benefits must be cut by that amount.
Why the shortfall? One reason is aging. As lifespans increase while birth rates decrease, there are fewer workers per retiree. But a bigger reason is that the very rich have captured an ever larger share of national income since the late 1970s, and thanks to the payroll tax cap, they do not pay a proportionate share of the payroll taxes that finance Social Security. (Any income above $184,500 is not subject to payroll tax, making it effectively regressive.)
An authoritative study by the RAND Corporation found that if the income distribution of the first two postwar decades had persisted, the bottom 90 percent (who pay Social Security taxes) would have an additional $2.5 trillion a year. Payroll taxes (12.4 percent) on $2.5 trillion would be $310 billion, or more than the annual Social Security deficit of around $250 billion a year.
Restoring a decent income distribution will take years of brave policies. But in the meantime, we can start taxing the very rich and dedicate some of the proceeds to making Social Security whole. An obvious start would be to uncap the payroll tax, which would bring in something like $3.2 trillion over a decade.
Then there is wealth, which is distributed even more unequally than wages. According to Federal Reserve data, the richest 1 percent hold about $54 trillion in capital assets. The income from that capital almost totally escapes taxation. If we taxed income from capital at the same rates as wage and salary income are taxed, that would increase federal revenue by enough to keep Social Security solvent and meet other needs as well.
An ongoing tax on capital income is a better approach than the proposed California one-time tax on the wealth of the very richest billionaires, which may be declared unconstitutional. Taxes on income from capital have repeatedly been found to be constitutional; the problem is that they are levied at token rates and are riddled with loopholes.
Trump compounded the problem with his 2017 tax cut for the rich. This added to the deficit and long-term debt, making it even harder to safeguard Social Security and Medicare, meet other needs, and also get the deficits under control.
What about the claim that dedicating so much money to seniors will be a hard sell to younger voters, who are skeptical that Social Security will be there when they need it and resent how much money goes to boomers? I put the argument to Guy Molyneux, one of the leading Democratic pollsters. “The polling pretty consistently indicates that young people continue to support Social Security and Medicare,” he told me. “They never bought the arguments for privatization. As they get into middle age, they support these programs even more.”
The last time the Social Security system faced a severe shortfall, in 1981 after the stagflation of the 1970s, Congress and the Reagan administration fashioned a bipartisan compromise that was one part cuts in benefits and one part an increase in payroll taxes.
A repeat of that sort of compromise is the last thing we need. For most seniors, benefits are barely adequate as is, and the payroll tax is our most regressive tax. We need to be taxing the very rich to protect everyone else.
Bipartisanship is all but dead. Taxing the rich to save social insurance has the further virtue of splitting Republicans, who are divided into fiscal hawks and politicians mindful of the needs of constituents. Let them be the ones to call for cuts in benefits.
Medicare gets into fiscal difficulty a few years after Social Security. It would be good politics to combine Medicare reform with broader reform of our grossly inefficient, hyper-commercialized health care system.
All of this represents smart politics and good policy for Democrats. Even though the fiscal crisis does not hit until the 2030s, the time to begin making these arguments is in next November’s election.
The post Trump’s Wreckage of Social Security and Medicare appeared first on The American Prospect.