Tens of millions of Americans rely on Social Security to make ends meet in retirement, and many more expect to use the program when they retire. Yet Social Security faces a financial crisis of epic proportions, as demographic shifts put pressure on its trust funds and threaten to leave it without enough money to pay full benefits by the mid-2030s.

Many proposals have surfaced over the years to try to shore up Social Security's financial condition, with tactics ranging from means-testing and changes to year-to-year benefit adjustments to higher payroll taxes and more extensive taxation of benefits. A new proposal from one senator instead focuses on using a renewed estate tax to help solve the Social Security problem, and the resulting debate has reawakened a longer battle about estate taxation more broadly.

How the new proposal would help Social Security

The latest new Social Security proposal comes from Sen. Chris Van Hollen (D-Md.), who made his case to the public last week. His bill, called the Strengthen Social Security by Taxing Dynastic Wealth Act, aims to address the financial shortfall in Social Security by boosting tax revenue from the estates of wealthy Americans.

U.S. Capitol building under a mostly cloudless blue sky.

Image source: Getty Images.

In particular, the legislation has two primary elements. First, it would boost the current estate tax rate from 40% to 45%. More importantly, it would reduce the size of estates that would qualify for a full exemption from the estate tax. Under current law, estates as large as $11.4 million in 2019 wouldn't have to pay any estate tax. The legislation would instead restore levels last seen in the estate tax laws for the late 2000s, cutting the exemption amount to $3.5 million.

Van Hollen specifically criticized the changes to the estate tax included in the tax reform package that passed through Congress and the White House in late 2017. By doubling the per-person estate tax exemption amount, tax reform gave couples an extra $11 million that could pass free of the tax. By the senator's calculations, that helped 1,900 estates each save $4.4 million that they otherwise would've had to pay.

In order to tie the estate tax into the Social Security debate, the Strengthen Social Security by Taxing Dynastic Wealth Act would change the sources of funding for Social Security to include estate tax revenue. In other words, the law would divert money that currently goes into the federal government's general fund and instead redirect it specifically into the Social Security trust funds.

Reopening the estate tax debate

Income and wealth inequality have become hot-button topics in the presidential campaign, and this isn't the first time that the estate tax has found itself at the center of proposed policy changes. Sen. Bernie Sanders (I-Vt.) discussed legislation earlier this year that would reset the estate tax exemption to $3.5 million. It went further than the Van Hollen proposal, setting a minimum estate tax rate of 45% that would ramp up to 77% for estates valued at more than $1 billion.

The primary problem with using the estate tax as a policy tool is that it's relatively small. A spokesperson for Van Hollen noted that even with the bill's changes, the resulting revenue would cover just over one-fifth of the estimated long-range shortfall in funding for Social Security. It would require other more extreme measures, such as boosting payroll tax levels, to raise enough revenue to close the funding gap fully.

Meanwhile, opponents of the measure argue that although the estate tax aims to tax the wealthy, it often snares taxpayers that aren't easily able to pay it. For example, farming families often have assets that on paper are worth enough to trigger estate tax liability. However, most of those families have nearly all of their wealth tied up in their farms, and short of selling their entire operation and giving up their livelihood, they often struggle to find ways to pay estate taxes even with the help of special payment plans.

No easy answers

If Social Security's financial challenges were easy to fix, it would've been done by now. It's critical to keep an eye on what lawmakers are suggesting as solutions to Social Security financing so that you can adjust your financial planning accordingly -- and express your opinion about whether you agree or disagree with proposals like these.