Forget That Ponzi Scheme Stuff

It’s the tax holiday, stupid

At the end of August, Nebraska senator Ben Nelson, a Democrat up for reelection next year, told members of the Lincoln Rotary Club that it didn’t look like he would support an extension of the payroll tax holiday the president negotiated with Republicans last Christmas. “I wish I could (support it),” he said. “But all you’re doing is taking money that otherwise would help Medicare and Social Security.” There’s nothing remarkable about politicians talking to Rotarians, but it was remarkable for a conservative Democrat to say he didn’t think extending the Obama payroll tax cuts was such a hot idea. On Friday, Texas GOP congressman Pete Sessions, who chairs an organization to re-elect House Republicans, did likewise by calling the payroll tax cut “a horrible idea.”

Instead of delving into why a conservative Democrat and a diehard Republican are pooh-pooing the president’s plan for bringing less revenue into the Social Security system, the media of late have fixated on the disparaging comments presidential candidates, in particular Rick Perry, have made about Social Security. At the Republican candidates’ debate last week, Perry once again called Social Security a Ponzi scheme and a monstrous lie. Said Perry:

I think the Republican candidates are talking about ways to transition this program. And it is a monstrous lie. It is a Ponzi scheme to tell our kids that are twenty-five or thirty years today: ‘You’re paying into a program that’s not going to be there.’ Anybody that’s for the status quo with Social Security today is involved with a monstrous lie to our kids, and it’s not right.

Perry was basically repeating what he had said before in Iowa, and it looks like he will stay on message as long as he remains a candidate. It will be up to the media to explain the difference between Social Security, which is social insurance where people pay taxes and accumulate credits and then receive a pension backed by substantial political commitment and trillions of dollars in financial reserves, and a Ponzi scheme, which is a criminal fraud backed by nothing, as Brookings Senior Fellow Henry Aaron puts it.

What’s missing are stories explaining, as Nelson tried to do, that there could be long-term consequences tied to reducing the payroll tax. “The Ponzi scheme is a sideshow. It’s an outrageous claim designed to undermine confidence in the program,” says Nancy Altman, co-director of Strengthen Social Security, a progressive group trying to save the program. Altman knows her onions when it comes to Social Security, having assisted Alan Greenspan, who headed a bipartisan commission in 1983 that put Social Security on a sound financing footing. Altman wasn’t keen on the payroll tax holiday agreed to last December, telling NPR that this “could eventually lead to the unraveling of Social Security.” If Republicans make this permanent, it could spell real trouble for Social Security, she said.

I asked Altman if she had changed her mind. Nope, she hadn’t, and discussed the red flags that the public and the press should think about as another payroll tax cut zooms through Congress. The payroll tax cut now in effect reduced the amount of contributions employees pay from 6.2 percent to 4.2 percent, and left in place employers’ contributions, also 6.2 percent. This time around the president is proposing that workers pay a payroll tax of only 3.1 percent—a fifty percent reduction from the 6.2 percent rate that has been in effect for two decades. Employers would also be relieved of making payroll contributions on the first $5 million of their payroll, a move targeted at small employers.

Altman says these cuts would not be a big deal if they were temporary, but she believes they’ll stick around. “Congress has been reluctant to increase marginal tax rates by a modest amount on the very wealthiest Americans; it’s hard to believe they would be eager to allow Social Security contributions to double on the lowest-income, working Americans,” she said.

The December deal was designed to keep revenues to Social Security exactly where they would have been by replacing the lost payroll contributions with general revenues. The legislation provided a dollar for dollar replacement for the lost contributions to Social Security. In other words, the program would be protected, and presumably that would be the case now. However, Altman notes that this benign solution is perilous in the long term. Through the years Social Security has been immune from successful attacks by groups and individuals who have never liked the system. That’s because of the link between what people have contributed through payroll taxes and the fact the program’s funds have been separate from general revenues.

If the government must dip into general revenues permanently to make the trust funds whole, then Social Security will contribute to the deficit, and may be in jeopardy, since the government has to borrow money to cover its debt. Right now Social Security does not contribute to the deficit, a point the president himself has made. “Too many Americans believe that their elected representatives have been stealing from Social Security,” said Altman. “This reinforces that perception. These are pension funds, not general taxes, and should not be cut to stimulate the economy or used for any purpose other than Social Security.”

She argues that there are better and more effective ways to stimulate the economy, like a one-time increase in food stamp payments, or an income tax break like the now-expired “Making Work Pay” tax credit part of the stimulus package that put more money into the pockets of working Americans. The press has barely explored these options. Nor has it made the connections between the arguments of Altman and others to the arguments of politicians, like Perry, that Social Security is destined to disappear. Obama’s plan to cut the payroll tax may accomplish exactly what Perry wishes for, and just might fulfill his predictions that Social Security won’t be there for today’s thirty-somethings.

A couple days ago, a retired cabinet manufacturer in Wisconsin learned that the proposed payroll tax cut could later impact Social Security. He responded that could not possibly be correct, because Obama was considering an income tax reduction. He had confused income taxes with payroll taxes, and had no idea that payroll taxes, called FICA for Federal Insurance Contributions Act, had financed his Social Security benefits. When it was explained that the payroll tax refers to his contributions to Social Security, and they were on the chopping block, he replied: “He’s trying to kill Social Security.”

For more from Trudy Lieberman on Social Security and entitlement reform, click here.

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Trudy Lieberman is a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for The Second Opinion, CJR's healthcare desk, which is part of our United States Project on the coverage of politics and policy. She also blogs for Health News Review. Follow her on Twitter @Trudy_Lieberman. Tags: , , , ,