Tax and Social Security in The New Paradigm
By Tom Donelson, Project Director and Research Associate, Americas Majority Foundation
SUMMARY
The current base of the Conservative Coalition is the hard-working Middle class and many of them are facing a retirement crisis including 35% of working Republicans over the age of 50 who are likely to face an income shortfall in retirement. These are the people most likely to have to stop working younger due to health reasons and most likely to depend on Social Security for
retirement income.
Cutting Social Security or delaying payment of full retirement benefits hits the base of the Conservative Coalition very hard. In our survey among Senior voters, a third of Republicans along with two thirds of independents supported taxing the wealthy to ensure Social Security solvency and even add additional benefits.
To understand the retirement crisis, it helps to look at how it plays out at the individual level.
A 55-year-old currently making $50,000 year could expect to receive $1,090 a month if they started taking Social Security at age 62 or $1,600 a month if they waited to age 67. If this person has $100,000 saved by age 67 and expects to live to 80, they can reasonably plan to draw $8773 in monthly income from their retirement savings for an annual income of about $30,000 (before
taxes) if they can wait till age 67 to draw Social Security.
If this same person has to retire at due to a health problem at 62 and has $85,000 saved, their monthly income from Social Security and savings drops to $1,678 a month or $20,000 a year.
Polling by VCreek/AMG has found that more than 40% of retirees with savings of less than $100,000 retired because of a health problem or downsizing.
These illustrations could easily apply to 35% of Republicans over the age of 50. The impact of the retirement crisis could dramatically realign the electorate as a significant share of those who would be hit the hardest are members of the current Trump/Conservative coalition.
The Social Security Trustees currently estimate the Trust Fund will be depleted in 2035 which will likely necessitate a cut in benefits.
The Democrats have already proposed their plan the Social Security 2100 act which includes phrasing out the $132,000 cap on Social Security taxes and increased rates to fund increased payments to retirees.
The Republican Study Committee has advocated a plan that would not raise taxes and extend the life of Social Security by realigning “full retirement age to account for increases in life expectancy since the program’s creation” by gradually increasing “the normal retirement age at a rate of three months per year until it reaches 69 for those reaching age 62 in 2030.” The Republican plan would also make adjustments to encourage Seniors to stay in the workforce longer and increase payments for workers who had lower life-time earnings.
Both the Democrat and Republican plans are actuarily sound. The Republican plan, though accurate in terms of life expectancy, does not account for working longevity. People may be living longer, but their productive working years have not increased at the same rate of life expectancy. The people most likely to need Social Security earlier because health problems reduce their capacity for work are more likely to have lower savings, lower life-time earnings and have engaged in blue collar or skilled trades work—the types of workers who are currently forming the base of the Conservative Coalition.
The Democrat plan with its tax increases does not take into the account the secondary effect that taxes have on the economy by reducing monetary elasticity. Historically, higher tax rates coincide with more frequent recessions. Recessions and their associated drops in the stock market wipe out the retirement savings of the middle and working classes and in terms of jobs tend hit the working classes that form the base of Conservative Coalition the hardest.