On Social Security, thanks ... and no thanks

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I received my first-ever Social Security benefit payment earlier this month, having run out of reasons to delay. There's something pleasing about the milestone apart from the extra cash flow.

I've paid into the system for more than half a century, doing my mandatory bit to fund the retirements of, mainly, my worthy parents' worthy generation. At the risk of sentimentality, and of saying a respectful word about progressivism's masterwork, to have arrived at the receiving end of this multigenerational support system feels, just a little, like a way of participating in conservative icon Edmund Burke's vision of civilization as a partnership among "those who are living, those who are dead and those who are yet to be born."

Back in 1934, Franklin Roosevelt insisted his Social Security scheme represented "not ... a change in values" but "a return to values lost" as the modern world's "complexities of great communities and organized industry" undermined the "security ... attained in earlier days through the interdependence of members of families ... and of families within a small community."

It's an appealing way of looking at it. But it's hard to counteract the modern world's tendency to dehumanize economic and community life.

The trouble with cooperating in the competitive marketplace through the guidance of an "invisible hand" is that this is not the sort of hand you can shake. And similarly, the public sector's direct electronic deposit of my old age benefit, arranged on the Social Security Administration's website without my ever speaking to an actual human being about it, feels rather less personal and humane than delivery of the "security attained in earlier days" might have been.

Even so, the flesh and blood reality behind the bureaucratic machinery and technocratic maze is that younger workers are, as of this month, giving this old-timer a hand — along with millions who are doubtless more deserving.

I appreciate it.

And I'd like to make the gratitude concrete by repeating a plea I've made before — that Minnesota lawmakers resist the pressure they reportedly feel to further (even completely) exempt Social Security benefits from state income taxes. They should focus instead on broad tax relief that better reaches those who need it most and gives incentives for work, investment and innovation, rather than for early retirement and less paid work among retirees.

The Minnesota Center for Fiscal Excellence, no enemy of tax relief in general, recently observed that "older taxpayers have little understanding of the rules governing Social Security benefit taxation." This lack of understanding, the center adds, "helps explain the mass enthusiasm for a proposal [to wholly eliminate state taxes on Social Security] when 54% of ... senior Minnesota filers would not benefit from it and 70% of the benefit accrues to filers with federal adjusted gross income in excess of $100,000."

Federal law already excludes a significant portion of Social Security income from taxation, and Minnesota has added additional subtractions over the years, as detailed on a House Research backgrounder web page.

According to a fiscal analysis from state Senate staff, exactly 3.3% of the $600 million or so in annual tax savings from a complete Social Security exemption would flow to Minnesota seniors reporting less than $50,000 in federal adjusted gross income. That's less than would go to some 6,000 senior households with more than half a million dollars each in gross income.

A worse distortion is how ever-increasing Social Security exemptions aggravate the tendency for tax laws to treat different types of income differently. An enlightening calculator on the House website reveals that even under current law, a married couple receiving two average Minnesota Social Security retirement benefits of around $20,000 each ($40,000 total) would not owe a penny of state income tax until they brought in another $27,455 in non-Social Security income. If their circumstances were pinched, it would not be the fault of state tax on their Social Security.

But if the same couple had the same $67,455 total income entirely from non-Social Security sources, they would have to fork over $1,974 to the state.

And that would be rather more in state tax than would be owed by a rather more affluent retired couple — where each of the spouses received a near maximum Social Security benefit of $50,000 and they drew $30,000 more in non-Social Security income. With $130,000 total income, this couple would today owe the state $1,616.

And under full exemption? Their state tax liability then would be ... $0.

There is neither equity nor common sense in such disparities. Gov. Tim Walz's proposal, released last week, would settle for reducing once again, not eliminating, the state tax on Social Security income, while denying the break to high-income retirees. But the bias against non-Social Security income would remain.

Yes, Social Security is different — we beneficiaries paid in over many years. That's why the current partial exclusions exist in both federal and state tax law. But contributions are a fraction of the benefit recipients collect over a long retirement, much of which is a modest but previously untaxed return on those contributions. There is no reason that return should be wholly tax free.

Tax-free Social Security would also, as mentioned, do nothing to stimulate productive activity and precious little to inspire well-heeled, talented elders to preserve their ties to the state. If high Minnesota taxes are adding to their wanderlust, it isn't the relative pittance they pay on Social Security that has them dreaming of Scottsdale or Sarasota.

By contrast, the almost explicitly punitive capital gains tax hike Walz proposed last week seems a reckless declaration that the well-off are not welcome in Minnesota.

Social Security faces financial challenges — and a political crisis — in the years ahead. Some combination of benefit cuts and tax increases will be needed. Though still manageable, the adjustments will be larger than they might have been because politicians have for decades been afraid to face the ire of seniors.

Still more special tax treatment would be yet more encouragement for us old-timers to believe that our interests are sacrosanct in a way other generations' are not.

Lawmakers could sensibly target relief to the relatively few lower-income seniors who are burdened by Social Security taxes. But overall, a better idea would be to reduce permanently the tax rate in Minnesota's lowest-income tax bracket. That would give all taxpayers a break and would favor work — stimulating and rewarding what has always been the surest path toward true security, in earlier days or today.