Connecting the Dots
The Estate Tax and Social Security

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OCTOBER 2007 - Over the past year, this column has addressed two major public policy issues that may seem, at first, to have little to do with one another. One issue—the estate tax (covered in September 2006)—is the on-again, off-again tax imposed on the estates of high-net-worth taxpayers after death. The other—Social Security (covered in February 2007)—is the rapidly depleting trust fund originally intended to spare hard-working Americans from living out their golden years in poverty. Both the estate tax and Social Security are “tax issues” to be sure, but they are not often connected in minds or debate.

The issues do, however, have similarities. Both were once hot topics in Washington, D.C., but have since fallen from the national spotlight. And—despite this recent lack of attention—both present challenges that will continue to worsen unless something is done soon.

The estate tax policy, for example, is in desperate need of consistency. Since the Economic Growth and Tax Relief Reconciliation Act was passed in 2001, a divisive, politically charged debate has placed the status of the tax in constant doubt. The federal government never tires of tinkering with it—or at least talking about tinkering with it, which in fact seems to be the norm, not the exception. As it now stands, estates worth $2 million or less are excluded from the tax, but in 2009 this exclusion will increase to $3.5 million. Moreover, estate tax rates will decrease from a top rate of 46% this year to 45% next year through 2009. In 2010, the estate tax will be repealed in its entirety, but—in a bizarre twist—in 2011 the tax will return, to pre-2001 levels (an exclusion of $1 million and a top rate of 55%).

Social Security, on the other hand, is consistent in its desperate need of funds. According to the best estimates of the Congressional Budget Office’s Social Security trustees in 2005, the Social Security trust fund balance will peak in the year 2017. Subsequently, assuming no policy changes, this trust fund will steadily decline until it is fully depleted in 2041. Once the Social Security trust fund’s assets are depleted, other tax revenues will be needed to keep benefits at currently scheduled levels; Social Security taxes will be able to fund only about three-quarters of its benefit obligations.

Give a Little, Take a Little

Perhaps there is another connection to be made between the estate tax and Social Security. What if the two policies could, in essence, be addressed with a single remedy?

Let’s say Congress were to firm up the estate tax by choosing one rate and one exemption, and index both of them for inflation. Estate tax monies—which are, after all, taxes to be used for the public good—would then be directed to one of our most important (and needy) public goods: Social Security. The estate tax would get a much-needed measure of consistency, and Social Security would get a necessary infusion of funds.

According to a 2005 report from the Center on Budget and Policy Priorities (a nonpartisan organization working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals), “The Chief Actuary of the Social Security Administration has estimated that maintaining the estate tax at the 2009 levels—with a $3.5 million exemption and a 45 percent top rate—would raise enough revenue to cover more than one-quarter of the shortfall in the Social Security Trust Fund over the next 75 years, as measured by the Social Security Trustees. The trustees estimate the shortfall to be 0.65 percent of GDP, while the revenue raised by this reform would equal 0.2 percent of GDP. The Congressional Budget Office projects a smaller shortfall (0.36 percent of GDP). Under CBO assumptions, the estate tax revenues collected under this reform would close about half of the 75-year shortfall.”

Sound too good to be true? Let me know your thoughts at

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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