Each day the payroll tax saga gets more complicated, and the public no doubt gets more confused. Bloomberg reporter Brian Faler and Remapping Debate’s Mike Alberti deserve loud shout-outs for their crisp and clear pieces this week about what could happen to Social Security if Obama and his allies win another tax holiday, touted as a way to restore America’s fiscal health.
Some Democratic lawmakers say that while President Barack Obama’s plan to cut payroll taxes may strengthen the U.S. economy, it may have some unintended fallout: weakening Social Security.
Democratic congressman Rush Holt, from New Jersey, told Bloomberg that he did not object to putting more money in people’s pockets, and there were lots of ways to do that—but Social Security was not one of them. He said it would be hard to support the White House plan. Rep. Jerry Nadler called the tax cut a “very bad” change to Social Security policy, but he added he would support it for another year or two anyway. A liberal congressman from New York taking a chance with Social Security? Complicated politics indeed!
Faler got right to the contradiction of the payroll tax cut. Obama is pushing it just as concern grows for the system’s long-term fiscal stability. Recall that the system will be unable to pay full benefits after 2036. Faler pointed out that Congress cut the payroll tax by two percentage points this year and wants to reduce it further next year, thus reducing the amount of revenue flowing into the system. The lost revenue, which goes to pay benefits of current retirees, is supposed to be made up from general tax revenues, a move that opponents of the tax cut say potentially severs the link between workers’ contributions and their right to benefits later on. Once general revenues are used, opponents say Social Security will be subject to the same political pressures as other programs.
The piece quickly moved into a discussion about Social Security fundamentals, which has been lacking in this year’s press coverage. How and why was Social Security funded with a payroll tax in the first place? It quoted Franklin Roosevelt, who knew that the connection between payroll contributions and the right to a benefit insulated the program from politics. Said Roosevelt:
We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions,” Roosevelt said. With those taxes in there, no damn politician can ever scrap my Social Security program. Those taxes aren’t a matter of economics, they’re straight politics.
Now those politics are a-changin’. Faler talked to Chuck Blahous, a former Bush administration official, who described the Obama tax cut as a “very fundamental transformation” in how Social Security operates. When you start funding Social Security with general revenues, he said, “you basically destroy any notion that people really paid for their Social Security benefits. We’ve got this political dynamic that says ‘well, if you don’t extend this, then you’re in favor of raising taxes on poor working people. If that’s the dynamic, then Social Security is in really severe trouble.”
Alberti’s piece showed how much trouble the program might be in if the payroll tax eventually becomes permanent, as many Beltway insiders believe. Alberti interviewed Joseph Thorndike, who directs the Tax History project at Tax Analyst, which publishes tax information. Thorndike noted that temporary tax cuts, or tax holidays, are rarely temporary. “We have an unpleasant tax record of applying temporary taxes that then just stick around. These temporary tax cuts are like vampires—they never die,” he said. Alberti dug into the clips and found that, last year, Tennessee Republican Bob Corker said that once the tax cut took effect “a year from now, when it expires, it’ll be portrayed as a tax increase.” And that’s what’s happened. “Now President Obama, lawmakers from both parties, and many members of the press, are indeed calling the return to normal rates a ‘tax increase,’” Remapping Debate reported.
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Excellent piece, thanks Trudy.
#1 Posted by Harris Meyer, CJR on Tue 6 Dec 2011 at 06:45 PM
Social Security benefits are ALWAYS funded with general tax revenues.
Every single dollar of the $2.5 trillion in the Social Security Trust Fund represents a dollar in benefits that will have to be paid from the general fund of the Treasury.
#2 Posted by padikiller, CJR on Tue 6 Dec 2011 at 07:46 PM
padikiller
you must be some kind of genius.
imagine the general fund having to pay back the money it borrowed from social security, the very idea!
next thing you know, the treasury will have to pay back all that other money they borrowed.
it gets so hard to tell stupidity from dishonesty anymore
#3 Posted by coberly, CJR on Wed 7 Dec 2011 at 05:32 PM
"Payroll tax" versus "income tax" is a distinction without a difference, with regard to the bottom line of the federal ledger.
Every single dollar collected in payroll taxes goes into the general fund of the treasury as soon as it is collected... And every single dollar paid in Social Security benefits is paid out of the general fund.
The money that is collected to "fund" Social Security is snatched by Congress and spent on a Canadian bus fleet for Obama and other "necessary" spending, while most of the money that is paid in benefits is borrowed from China and Japan, just like the money that is borrowed to cover the federal deficit, and then used to "redeem" the IOU's in the Trust Fund's file cabinet.
"Tax income is deposited on a daily basis and is invested in "special-issue" securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund."
http://www.ssa.gov/oact/progdata/fundFAQ.html#n4
It's nothing but a shell game.
#4 Posted by padikiller, CJR on Wed 7 Dec 2011 at 11:27 PM
Today each persons FICA tax goes straight to OASDI and is paid out to beneficiaries as Social Security checks, Disability checks, death benefits. The remaining taxes (and this will change by 2035 unless changes to Social Security are made) go into Treasury bonds (the trust fund) which is in the General Fund. Treasury bonds are bought by foreign countries, CEOs, you, me. They are backed by the US Government. If they weren't, China would own us (wait, they do already). The US Government can and does use the General Funds to pay for its operations. But the US Government has to pay Social Security back. So we are OK until about 2035. However, with this payroll tax (FICA) cut, Social Security will be underfunded and more money to pay beneficiaries will come out of the General Fund This is what makes some people in the know think will be the demise of Social Security because if money comes from the General Fund, then it is not your FICA taxes paying for it and so there will be no mandate to continue Social Security. What do you think will happen?
#5 Posted by condon, CJR on Thu 8 Dec 2011 at 09:43 PM
condon wrote: "Today each persons FICA tax goes straight to OASDI and is paid out to beneficiaries as Social Security checks, Disability checks, death benefits"
padikiller responds: This is not true.
Employment taxes are transferred into the general fund of the treasury immediately and replaced with IOU's from Congress. When benefits are paid, these IOU's are redeemed with money paid from the general fund.
The truth bears repeating:
Every single dollar collected in payroll taxes goes into the general fund of the treasury as soon as it is collected... And every single dollar paid in Social Security benefits is paid out of the general fund.
#6 Posted by padikiller, CJR on Fri 9 Dec 2011 at 08:15 AM
Padkiller is dead wrong.about everything.
Every dollar collected via FICA or from the tax on benefits is required by the Social Security Amendments of 1939 to be credited to the Social Security Trust Funds which are operationally and legally separate from the General Fund. Something fully documented by the Analytical Perspectives on the Budget, the explanatory document that accompanies the Presidents's Budget each year. Or via the Trust Fund Monthly Reports published by Treasury. The 'General Fund' has a specific legal and operational definition and it just isn't true that the funds are ever intermingled. Lazy, very lazy.
Two there is no requirement that the $2.6 tn Trust Fund balannce EVER gets paid out. In fact if Social Security ever obtains the official state known as "Sustainable Solvency", something that could be accomplished by minor tweaks on the revenue side (per the wild eyed crazies who score such things for CBO) all such principle would have to b retained as well as most of the debt service in order to maintain a 'Trust Fund Ratio' at its mandated minimum of 100.
Yes it is odd that Trust Fund assets are as real as real and yet ideally never need to be redeemed, in fact any such redemption would be a sign of profound failure of Solvency as defined by the SSA Officeof the Chief Actuary, yet if one takes the time to study the numbers that is the forced conclusion.
Padkiller's line of argumentation is facile and even plausible. Still it is legally and operationally dead wrong and a cautionary tale about the dangers of too little information. Oh and BTW about hubris.
#7 Posted by Bruce Webb, CJR on Tue 20 Dec 2011 at 10:38 AM
Geek alert. If numbers make your eyes glaze over just skip this.
The Social Security Trustees are mandated to target 'Short Term Actuarial Balance' while also keeping an eye on 'LongTerm Acturial Balance' in each case 'Acturarial Balance' is defined as projecting year end Trust Fund balances for every year in the projection period at 100% of next year cost. In this context 'Short Term'is defined as ten years and long term as 75 years. Currently the combined Trust Fund (there are two) have a Trust Fund Ratio of just over 350. On the other hand projected Cost goes up every year and it turns out arithmetically that putting Social Security on a smooth glide path to Sustainable Solvency while gradually reducing the RATIO towards 100 never requires reducing the BALANCE below its current level and in fact requires its augmentation in nominal terms.
Yes Trust Fund Assets are real and as such require a certain level of debt service from the General Fund. But oddly never actually need to be redeemed. Not if we fix Social Security as it generally has been in the past-by small tweaks to FICA rates. But you have to do the math. Or at least glance at the data tables.
#8 Posted by Bruce Webb, CJR on Tue 20 Dec 2011 at 10:59 AM