The Joint Committee on Taxation, Congressional Budget Office, and Tax Policy Center agree that, without significant changes, the House-passed tax bill (the Tax Cuts and Jobs Act, or TCJA) would add about $1.5 trillion to our nation’s debt over the 10-year budget window. Over the longer range, this proposal would increase the debt even more.
Someone must eventually pay for these net tax cuts, which are expected to benefit higher-income households much more than those with lower- and middle-incomes. Unless the tax cuts spur immense economic growth, which many prominent economists doubt based on decades of evidence, these cuts will harm future workers and Social Security and Medicare beneficiaries.
Social Security and Medicare (net of offsetting Medicare contributions) currently comprise about 39 percent of federal spending, excluding interest on the debt. Under current law, this share will increase to 46 percent over the next decade as the large Baby Boom generation ages and collects promised benefits. Curbing immigration will reduce the number of workers available to support retirees and could make this already unfavorable demographic situation worse. Because Social Security and Medicare represent nearly half of non-interest government spending, those promised benefits could soon find themselves in budget-cutters’ cross-hairs.
Social Security and Medicare already face funding challenges. The Social Security Trustees project that the program’s shortfall over the next 75 years is $12.5 trillion in present value. To close that gap, Congress would need to permanently and immediately raise Social Security payroll taxes by 22 percent (2.76 percentage points), permanently and immediately reduce benefits by 17 percent, or some equivalent combination of the two, according to the Trustees. If Congress preserves promised benefits for current Social Security recipients, then benefits for future beneficiaries must be cut even further, by 20 percent.
Benefit reductions could devastate many Americans who rely on Social Security and Medicare. Social Security benefits are often modest. Retiree benefits average about $1,300 per month, or about $16,000 annually. Under current Medicare rules, older adults’ out-of-pocket cost shares for health care are already slated to rise in coming decades. The Census Bureau estimates that about 14 percent of adults ages 65 and older are impoverished, based on the Supplemental Poverty Measure, which accounts for health care costs.
Cosponsors of the House bill have made their intentions toward Social Security clear. House Speaker Paul Ryan (R-WI) would shrink Social Security’s long-range funding gap primarily by reducing scheduled benefits. His Roadmap for America's Future Act of 2010 would sharply curb the growth of Social Security benefits for future workers and increase the full retirement ages to track increases in life expectancy. It would also add carve-out personal accounts to the program. At a Virginia town hall last week, he again called for entitlement reductions.
Representative Sam Johnson (R-TX) has introduced the Social Security Reform Act of 2016 that would reduce Social Security replacement rates for all but the lowest-income workers, increase retirement ages, and reduce the cost-of-living adjustment (COLA), along with other changes. During debate over the Senate version of the TCJA, legislators voted down a Democratic amendment to exempt Social Security, Medicare, and Medicaid from cuts if revenues fall short of current law projections because of the tax cuts.
Adding to the nation’s debt while our population is aging rapidly is ill-advised and maybe dangerous. My Tax Policy Center colleagues have warned about the potential for catastrophic budget failure, a consequence of lawmakers’ avoiding necessary fiscal reforms. The longer Congress keeps avoiding difficult choices and adding to the debt, the greater the risk that investors’ confidence in US credit worthiness could rapidly decline and lead to a debt crisis.
There are compelling reasons to improve our personal income and corporate tax systems and to consider new mechanisms for increasing revenues. But when tax changes add to our already significant debt, they further constrain Congress’ ability to keep its promises to American workers who have been contributing to Social Security and Medicare throughout their careers and to respond to unanticipated events.
Policymakers have known about this looming demographic challenge for decades. Increasing the debt now for economically dubious—and undoubtedly regressive—gains could threaten Social Security and Medicare in the not-so-distant future—or, in the case of Medicare cuts, nearly immediately.
TCJA’s shift to indexing many tax parameters using the chained consumer price index for all urban consumers (C-CPI-U) could have important implications for Social Security were Congress to extend this change to Social Security benefits. Social Security actuaries estimate that shifting the COLA to the C-CPI-U in December 2018 could reduce Social Security’s long-range fiscal shortfall by about 20 percent, but COLA reductions would hit older, long-term beneficiaries particularly hard.
Citizens should ask themselves whether the business and personal income tax cuts in the House and Senate versions of the TCJA are worth increasing the risk of steep Social Security and Medicare reductions in the future.
