Bernie Moreno Picked Tax Hikes Over Smarter Social Security Reform

A new proposal from a center-left fiscal policy organization highlights a path to strengthen Social Security without imposing large tax increases on workers and small businesses. Rather than raising payroll taxes, the Committee for a Responsible Federal Budget (CRFB) has proposed slowing future benefit growth for the highest-income retirees while preserving full inflation protection for low- and middle-income seniors.

If a center-left fiscal policy organization is proposing targeted benefit reforms instead of broad payroll tax increases, why is Sen. Bernie Moreno (R-Ohio) embracing an approach more closely associated with Sen. Elizabeth Warren (D-Mass.)?

A Better Way to Improve Social Security's Finances

The Center for a Free Economy has previously opposed proposals to raise or eliminate the Social Security payroll tax cap. Such proposals would amount to one of the largest tax increases in decades, placing additional burdens on small businesses, entrepreneurs, and higher-earning families while reducing incentives to work and invest.

The Committee for a Responsible Federal Budget has taken a different approach by advancing two proposals that focus on the spending side of Social Security.

The first would cap annual cost-of-living adjustments (COLAs) for retirees receiving the largest Social Security benefits. Every beneficiary would continue receiving an annual inflation adjustment, but retirees with the highest monthly benefits would eventually reach a maximum dollar increase, allowing those with smaller benefits to continue receiving their full COLA.

The second proposal would establish a maximum annual Social Security benefit for the highest-income retirees. Like the COLA cap, it concentrates reforms on beneficiaries with the greatest lifetime earnings instead of increasing taxes on current workers.

Neither proposal relies on the broad payroll tax increases supported by Warren and increasingly embraced by Moreno.

Protecting Inflation Benefits While Improving Solvency

Social Security already replaces a smaller share of pre-retirement income for higher earners than it does for lower earners. However, because annual COLAs are calculated as a percentage of monthly benefits, retirees receiving the largest checks receive the largest annual dollar increases.

The Committee for a Responsible Federal Budget's proposal would preserve annual inflation adjustments while limiting the largest COLA increases over time.

According to the organization, a COLA cap beginning at the 75th percentile of beneficiaries would save approximately $115 billion over 10 years and close about 10% of Social Security's long-term financing gap. A cap beginning at the median benefit would save $385 billion over the same period and close roughly 27% of the projected shortfall.

Because the proposal applies prospectively, savings begin immediately and compound over time.

A Progressive Reform Without Raising Taxes

The proposal is intentionally designed to concentrate its effects on retirees receiving the largest Social Security benefits.

The Committee for a Responsible Federal Budget concludes that most of the savings would come from the highest-income beneficiaries, while lower-income seniors would experience little or no reduction in scheduled benefits. The proposal would have no measurable effect on poverty because it preserves full inflation protection for beneficiaries with modest Social Security payments.

The proposal avoids discouraging work because eligibility is based on lifetime Social Security benefits rather than current income. Older Americans who choose to remain in the workforce would not face higher marginal tax rates or reduced benefits simply because they continue working.

Unlike a payroll tax increase, this approach preserves work incentives while improving the program's finances.

Improving Benefit Security

Current law provides that if Social Security's trust fund becomes depleted, benefits must be reduced across the board to match incoming payroll tax revenue.

By improving the program's finances before that point, a COLA cap would reduce the size of those automatic reductions.

The Committee for a Responsible Federal Budget estimates that strengthening Social Security's finances through targeted reforms would result in higher payable benefits for many lower-income retirees after insolvency than they would receive under current law because fewer across-the-board reductions would be necessary.

The proposal strengthens retirement security for the beneficiaries who depend most on Social Security while asking retirees with the largest benefits to accept more modest future benefit growth.

Why Is a Republican Supporting the Tax Increase Instead?

The contrast between these approaches is difficult to ignore.

One path raises taxes on workers, families, entrepreneurs, and small businesses in an effort to finance higher benefits indefinitely. The other asks retirees with the largest Social Security benefits to accept somewhat slower future benefit growth while protecting inflation adjustments for the overwhelming majority of seniors.

The latter approach comes from a fiscal policy organization that is not generally associated with conservative entitlement reform proposals. The former has become the preferred approach of Warren and now appears to have gained support from Moreno.

For conservatives seeking market-oriented solutions to Social Security's long-term challenges, that contrast should prompt serious reflection.

CFE Takeaway

Social Security's long-term financing challenges require difficult choices, but large payroll tax increases are not the only option. The Committee for a Responsible Federal Budget's COLA cap and related proposals demonstrate that targeted reforms can improve the program's finances while preserving full inflation protection for most retirees and avoiding new taxes on workers and small businesses. Conservatives should give those ideas far more consideration than proposals that expand the payroll tax burden.