Thomas Pushes for Social Security Tax Cuts

The House Ways and Means Committee made Social Security the focus of its work over the past two weeks, holding a number of hearings and announcing the intention to write legislation this summer. Rep. James McCrery (R-LA), chairman of the Subcommittee on Social Security, stated House lawmakers will be ready to write Social Security legislation by July 1. However, this legislation could very well include a number of deleterious tax cuts -- masked as savings incentives -- that would primarily benefit the wealthy, not fix the problem of Social Security solvency, and would further add to the nation's budget deficits.

Ways and Means Chairman Bill Thomas (R-CA), held a press conference April 29 in which he both reasserted his dedication to reforming Social Security and proposed the idea of combining benefit reductions with additional tax cuts on savings and investments. Thomas and McCrery believe by coupling benefits cuts with tax cuts in their Social Security reform plan, they would compensate middle- and upper-income earners for the losses they would accrue under a privatization plan. In reality, these regressive proposals would primarily benefit upper income Americans and simply serve to drive the nation deeper into debt.

Thomas has indicated his proposed legislation may consider the following components:

• Expanded tax breaks for Individual Retirement Accounts (IRAs)
• Making permanent the capital gains and dividend tax cuts enacted in 2003
• Providing other tax cuts and tax incentives on investment income and pensions

Thomas has made no mention of a plan to pay for any of these tax cuts, each of which would come with large and long-term costs. These tax cuts would mostly benefit those people who have already received the majority of President Bush's first-term tax cuts. The Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, has estimated people with annual incomes of over $1 million will receive tax cuts averaging $136,000 when the 2001 and 2003 cuts are fully in effect.

The proposals mentioned by Thomas would not only be costly, but they would hurt low- and middle- income workers. Benefit checks received by low-income earners represent a much larger percentage of their total retirement income as compared to other income brackets. Thus, low- and middle-income earners are more seriously affected by any cuts, big or small, to Social Security. The tax cuts, which Thomas claims would offset any reductions in benefit, will help the wealthy far more than anyone else, leaving low- and middle-income Americans with little support.

One of the specific proposals Thomas is pushing -- raising the amount workers can contribute to retirement plans such as 401(k)s and IRAs -- reflects a core component of the administration?s proposal for private accounts. Individuals under 50 can currently contribute $14,000 per year to a 401(k) and $4,000 a year to an IRA. This proposed tax incentive would not add to retirement savings for the vast majority of Americans -- it would only help a very small percentage who already contribute the maximum amount allowed. Studies by the Congressional Budget Office and the Treasury Department show only about five percent of those eligible for IRAs and 401(k)s contribute the maximum amount. Allowing this small percentage of workers a greater opportunity to contribute to their retirement savings and save on taxes does nothing to help the low- and middle-income earners who would experience more debilitating benefit cuts under a privatization proposal.

These pension and investment tax cuts have a number of supporters who have been waiting for an opportunity such as Social Security reform to have a salient platform to push their priorities. These cuts benefiting the wealthiest Americans are deficit financed and thus will cause more harm over time. For legislators who claim they want to shore up budget and Social Security shortfalls, these proposals would irresponsibly add to long-term deficits and ignore the small but real problems of Social Security solvency. They should be rejected.