Former President Donald Trump recently proposed eliminating taxes on Social Security benefits paid by American seniors. By contrast, his running mate J.D. Vance has emphasized the need to reduce the tax burden on young working families.
In this intra-ticket debate, Vance has it right. In 2021, the 17% of Americans aged 65 and older held 35% of the nation’s assets, received 66% of its entitlement spending, but contributed only 11% of its tax revenue.
Although American seniors typically have lower incomes than young adults, their average net worth is several times higher. They are exempt from payroll taxes, often excluded from property taxes, and generally owe much less in income tax. Nor do they need to set aside funds in case they lose their jobs. The majority of seniors own their homes outright, and they do not incur expenses associated with commuting or living in proximity to employment. Nor must they bear the cost of feeding, housing, clothing, looking after, and educating children, or the costs of repaying student loans. Although seniors receive more than twice as much medical care as working age adults, they pay less for it in premiums and out-of-pocket expenses.
As a result, seniors spend more on restaurants, travel, and entertainment than other adults, and enjoy almost twice as much living space as the youngest workers. By contrast, young adults are twice as likely as seniors to go without meals, healthcare, or being able to pay utility bills. They are also more likely to live in pest-infested houses or where they feel threatened by crime. These disadvantages are passed on to their children.
In 2021, the lowest income quintile of Americans aged 35 to 44 received an average $5,372 in benefits, but paid $3,106 in taxes. By contrast, the poorest seniors aged 75 to 84 received $16,496 in benefits net of taxes, the middle quintile of that age group $31,973, and the richest $12,430.
Redistribution towards seniors is projected to increase over time. Over the next thirty years, spending on Social Security and Medicare will rise from 8.4% to 11.3% of GDP, while spending on other entitlements is expected to decline from 5.5% to 4.8%.
Initially, the Social Security benefits accruing to each generation of retirees were supposed to be equivalent to the payroll taxes they had previously contributed. But rapid inflation during World War Two caused this arrangement to be abandoned, and Congress in 1950 hiked benefits 70% beyond what had previously been contributed. Since then, the burden on workers has grown as the number of working taxpayers supporting each Social Security beneficiary has fallen from above 16 to below 3.
Within generations, Social Security benefits have never been distributed in direct proportion to prior earnings. While a worker earning an average of $150,000 per year would receive old age benefits three times greater every month than one who previously earned $15,000; they would have contributed ten times more to the program in payroll taxes. But payments also vary greatly according to longevity. Those dying before retirement would receive $0 in return for their contributions; those living to 100 could receive over $2 million. As high-earners on average live 13 years longer into retirement than low-earners, the affluent who receive more every month would also receive more monthly payments.
In Medicare, the steady expansion of benefits to incorporate new medical services and procedures has never been limited by prior payroll tax contributions. In 1966, most of the initial enrollees received comprehensive medical benefits without having contributed any payroll or income taxes to the program. Medicare spending per beneficiary has since increased from $1,249 in 1967 to $15,547 in 2023 after adjusting for inflation) – and only 15 percent of the cost is covered by premiums paid by beneficiaries. The burden of paying for Medicare has grown further as the ratio of workers to beneficiaries has declined.
As a new Manhattan Institute report documents, the magnitude of redistribution from workers to seniors now substantially exceeds what can be justified in terms of smoothing resources over the life cycle. In fact, it shifts funds from times of need to times of plenty.
America’s workers should be required to finance a safety-net of cash and healthcare benefits for seniors. But the bulk of Social Security and Medicare spending goes to middle-income American seniors, and therefore mostly serves to crowd out private financing, rather than to diminish poverty or access to medical care. To lessen the burden on young working families, the nation’s entitlements for seniors should be made better focused on filling unmet needs.
Chris Pope is a senior fellow at the Manhattan Institute.
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