Elizabeth Warren And Bernie Moreno’s Plan Won’t ‘Save’ Social Security

A lot of bad ideas to save Social Security are being floated. Two U.S. senators, in the New York Times, just proposed a dreadful one that would clobber both the system and the economy.

For years we’ve been deluged with stories about the Social Security system’s going broke in the early 2030s. The trust funds are paying out more in benefits than they’re taking in from payroll taxes. The purported villain is that we’re living longer and the number of working people is inadequate to pay for the promised benefits.

Senators Elizabeth Warren (D–MA), and Bernie Moreno (R–OH) propose removing the earnings cap—$184,500—on wages taxed for Social Security. The 12.4% tax, which is split between employer and employee, stops at that level. They want the cap gone.

It’s no surprise that one of the sponsors is Senator Warren, a socialist in all but name. However, Senator Moreno is a Republican and represents a disturbing trend among some in the GOP who think the way to victory is indulging populist sentiment, whether it’s boosting taxes on the so-called rich, imposing price controls on pharmaceuticals (which would eventually smother innovation, just as it has in Europe and elsewhere), catering to power-hungry unions (let’s force rail shippers to hire unneeded train crews), going against Israel, scapegoating certain industries for high prices or imitating socialists of old by taking ownership stakes in companies in the name of national security. These Republicans should ask how well such pandering did for the Conservative Party in Britain, which is now on life support.

The scheme proposed by these two senators would constitute one of the biggest tax increases in history. It would effectively send the top income tax rate to over 50%, a level not seen since 1969. Some 5 million Americans earn above that $184,500, and their numbers are rising, thanks to inflation and an improving economy. The tax increase would disproportionately hit people in high-cost, tax-heavy blue states, such as New York and California—and Massachusetts. This hair-brained idea would harm the economy by diverting trillions of dollars of potential capital from the private sector.

The billionaires so hated by Democrats and certain Republicans have ways to escape this tax. Those who get most of their pay in salaries would be slammed.

The tax would lead to a proliferation of ways to avoid the higher levy. Tax shelters and other schemes would proliferate. Considerably more time and brain power would be diverted from productive activities to such dead-end efforts. That, too, would harm the economy.

Such efforts at avoidance would lead to cries to apply payroll taxes to non-salary incomes such as dividends. It would fuel proposals for a national wealth tax. This means even more capital destruction and less investment for productive growth, another downer for future prosperity.

There are two big things that tax-raisers like those senators never understand. First, taxes are a price and burden. Real-world experience repeatedly shows that when you boost the price of productive work and success, you get less of them. Less growth means less revenue to pay Social Security benefits, among other things. Second, victims of higher taxes don’t stand still and get sheared like obedient sheep. These two facts mean that revenue estimates from higher levies are rarely realized.

Another fact these tax lovers don’t grasp is that predictions of the demise of Social Security are based on historically low rates of economic growth and productivity. For most of our existence as a nation, we’ve averaged 3%-3.5% growth. Reasonable government policies make that eminently achievable, which puts doomsday off for many years.

The best answer for the future of Social Security is to establish personal accounts with proper regulations for younger people into which part of their payroll taxes would be deposited. This would turn Social Security from a capital destroyer to a capital creator. And participants would get far higher benefits than the current system can possibly provide.

Another thing: politically, there’s no way Social Security benefits will get cut.