The tax cuts ignore this impact on Social Security's finances

[Zorro]

The issue of Social Security is nearly invisible in the eye of the voter these days. Congress has just approved a massive tax reform without even a word about how it will affect the long-term financial prospects of the nation’s social insurance programs.

Typically, even critics of the GOP’s ideas on tax reform limit their concerns to the possibility that rising budget deficits might force Congress to consider reductions to benefit levels in Social Security. To them, the connection between tax reform and Social Security is a matter of politics and priorities.

Make no mistake, the connection isn’t political. It is economic. Social Security draws revenue from the income taxes levied by the IRS on benefits. Medicare also collects money. Thus, meaningful tax reform particularly for those in the middle class is apt to add to the financing pressures of both.

Income-tax revenue is important to Social Security because it is free cash flow that is forecast to grow rapidly. In the latest trustees’ report, the authors projected that the system would gather about $35 billion in revenue from income taxes in 2017. While this sum is currently overshadowed by payroll tax revenue, income-tax support for Social Security is projected to grow at more than three times the rate of the economy to more than $80 billion over the coming decade. That figure approximates the payroll taxes of roughly 20 million active workers.

https://www.marketwatch.com/story/the-tax-cuts-ignore-this-impact-on-social-securitys-finances-2017-12-21

[Angry Dragon]

1. This post is confusing ......pay-roll taxes fund SS

income taxes has nothing to do with SS

Unless I am reading this post all wrong

[Igel]

2. I thought so, too.

But Social Security benefits are referred to as subject to federal income tax laws, and it seems that when Social Security benefits are taxed that income tax money goes to either the Social Security Administration programs or Medicare.

https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html

The link in the OP crashes my browser every time, so there's the official .gov reference. But it means I can't read the article to follow their reasoning.

[Hoyt]

3. Confused me too, but article sort of explains. If one continues to work

while drawing SS, SS is subject to income tax past a certain threshold. Those taxes apparently go into the SS Trust Fund (which I never really thought about). If the tax rates and resultant collections are lower, less goes into SS Trust Fund.

[PoindexterOglethorpe]

4. If you collect SS before reaching your full retirement age, currently 66, set to start rising

in a couple of years, then the SS is subject, not to income tax, but to a reduction past a certain threshold.

All SS is subject to income tax if you make too much money.

Two different things.

[karynnj]

7. The "extra" dollars raised by the FICA tax were "borrowed"

by the goverment to pay general budget costs. Even the calculation of deficit and surplus were based on the total money raised vs spent. I think that started under Reagan.

The first time I heard suggestions that that money was gone and we should just accept it as gone, was in the W years after he was reelected and Greenspan, who was involved in the 1980's increase to fund the future baby boom costs, was one of the people saying that they could not take that kind of money out of general funds.

Note if that really is allowed to happen you could say that the regressive pay roll taxes indirectly funded the Reagsn, W, and Trump tax cuts. Wonder why income inequality increased over that time?

[yurbud]

10. imagine if they did that with other debts like bonds...

they wouldn't Wall Street would be on their ass like flies on shit.

They don't dare welch on a debt to the wealthy, but have no problem trying to do it to the rest of us.

[JayhawkSD]

5. Big misinformation promulgated here.

I don't know where anyone gets the idea that the income tax on Social Security income is returned to the Social Security Trust Fund. It is not. It is federal income tax and is put into the general revenue fund.

In general, retirement income which is funds set aside by a taxpayer from money that has already been taxed is exempt from income tax. Congress decided, however that since a) half of the contribution to a person's Social Security comes from the employer and b) since the average person lives long enough to receive much more than the amount he/she puts into the fund, even allowing for growth due to interest, that the government could tax 85% of the benefit without the risk of taxing that income twice. The argument is a little bit "iffy" but is not entirely spurious.

The new tax law would only endanger the Social Security Trust Fund, and the longevity of the program, if it reduced the payroll amount subject to payroll taxes, which it does not do. (Only the employer could do that, by paying the employee less money.) It does reduce federal income tax withholding, but that is a separate issue entirely from Social Security withhilding and the funding of the SS Trust Fund.

Two blatant misstatements in the original post.

"Congress has just approved a massive tax reform without even a word about how it will affect the long-term financial prospects of the nation’s social insurance programs."

That's because it has no effect whatever on the long-term financial prospects of the nation’s social insurance programs.

"Social Security draws revenue from the income taxes levied by the IRS on benefits. Medicare also collects money."

It does nothing of the sort; neither Social Security or Medicare "draw revenue" from the federal income tax levied on Social Security benefits. Medicare revenue is not derived from federal income tax and is not handled by the IRS. It is drawn from payroll taxes on income, and no payroll taxes are levied on Social Security income. Federal income tax levied on Social Security income is paid into the general revenue account to pay for all government operating expense.

This should not be taken to mean that I agree with or approve of the new tax program. There is a great deal that is wrong with it. But it having a deleterious effect on social insurance programs is nonsense.

[modrepub]

6. Complicated

I generally think you understand how this works and I agree with your analysis. The one thing we do not know is when we will cross the threshold where the SS fund goes from a collection surplus (now) to a collection deficit (???). At that point the "trust fund" (all those US bonds that were issued since Regan and Congress upped the SS tax rate) will need to be tapped or more rightly paid back. Without adequate revenue either the fund will have to be paid out of general revenue or new bonds issued to pay off the old bonds. The government really hasn't had to borrow as much as thought because the SS surplus has been used to help pay bills. The US bond market will tell the tale. My guess is if there is not enough interest in buying bonds then interest rates will go up or Congress will cut benefits and claim there is no money.

[JayhawkSD]

8. True enough.

But none of that has anything to do with the new tax program having any effect on the longevity of Social Security. It does not cause the program to deplete the fund any sooner, nor does it reduce input to the fund from payroll taxes.

I would take issue with, "The government really hasn't had to borrow as much as thought because the SS surplus has been used to help pay bills." In fact, the government has borrowed that money from the Social Security Trust Fund, issuing Treasury Bonds which are debt in exactly the same manner that T-Bills sold to the public and foreign governments are. Another way to look at it is that Social Security has placed its excess cash into savings in the form of Treasury Bonds in precisely the same manner than many citizens do and for precisely the same reason - because they are safe.

The only effect the income tax change might have is that, in increasing the deficit and causing the debt to increase, it might lead Congress to decide that cuts in the social safety net programs are needed to offset the reductions in income tax revenue. But that is not actually a result of the income tax change, it is the result of idiotic thinking in Congress.

[modrepub]

11. The SS Surplus does go into US Bonds

My point is that that money isn't really being "raised" through traditional means, i.e. a bond sale that pulls in capital from willing people. It's kind of money that's already on the table through excess SS taxes. When the SS surplus (plus interest) is no longer "there" the government will have to pull in more money to finance its debt. If there isn't enough to cover a bond issue then the US government will have to raise interest rates to "attract" more money, which will jack up interest rates on everything else. To date there has never been a shortfall in a US bond call that I know of. When the SS surplus (plus interest) is no longer "there", which is going to happen one day soon, we will see if the capital markets will be willing to make up the difference without any large interest rate changes.

[yurbud]

9. payroll taxes have to pay BACK money borrowed from SS

via the pre-funding of baby boomers retirement.

When a politician talks about not being able to keep up current benefits or index them to inflation or whatever, what they really mean is they don't want to pay back what they have borrowed since the Reagan administration.

If they did that with regular bonds, our credit rating would be in the toilet.

[Nitram]

12. Isn't that exactly what the GOP wants?

They aren't ignoring Social Securities finances, they are actively attacking them.