Last week, Congress voted to extend the payroll tax holiday through the end of 2012. Social Security supporters have argued that a tax holiday may not be such a hot idea, and could jeopardize the program’s future by changing its revenue stream and eventually making it compete with other programs for general revenues. Alarm bells rang at the end of 2010 when the Obama administration managed to cajole Congress into cutting the payroll tax for one year in order to channel a few more dollars into workers’ pocketbooks. When advocate Nancy Altman argued in an interview with NPR that once tax cuts are in place, they are hard to repeal, she sounded like Moses in the wilderness. The press was busy portraying the tax cut as a welcome Christmas gift from the president.
The tax holiday expired in December, and Congress agreed to a two-month extension, which will now last until the end of the year. This time, the press expanded its coverage and reported that politicians of all stripes wondered if such a move was wise. The NewsHour’s Judy Woodruff asked House Minority Leader Nancy Pelosi if she was worried that the money taken from Social Security by reduced payroll contributions might never be fully repaid. “No, I don’t worry about that,” she replied. “I think that this should be the last year for it. One or two years, no, the trust fund can handle that.”
Other outlets reported that not all Democrats were on board with the extension. On the Senate floor, Iowa Democrat Tom Harkin was blunt:
I never thought I would live to see the day when a Democratic president and a Democratic vice president would agree to put Social Security in this kind of jeopardy. Never did I imagine a Democratic president beginning the unraveling of Social Security.
Later Harkin said: “It’s the devil’s deal. It’s a bad deal.”
Opposition also came from the other side of the aisle. Jeff Fortenberry, a Republican congressman from Nebraska, voiced similar concerns. Said Fortenberry: “They are framing it as a middle-class tax cut even though this is a significant change to how Social Security has traditionally been treated. The payroll tax keeps Americans attentive to the fact that they put a little bit aside each check for Social Security. That connection is now gone.”
It isn’t gone yet, but commentators on both sides are raising the possibility that the tax holiday may eventually break the historical link between payroll tax contributions and workers’ rights to a benefit in old age. They are, in effect, asking whether the payroll tax holiday is actually a middle class class tax cut, as claimed by the Dems, or the destruction of workers’ retirement security, as suggested by the GOP.
Jeffrey Brown, who served as a senior economist for President George W. Bush’s Council of Economic Advisors and who traveled with the Bush White House campaign when it was promoting Social Security privatization in 2005, wondered on the Forbes site if “maybe President Obama really is the Damn Politician that FDR was worried about.” Brown was referring to FDR’s famous comment from 1941: “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.”
Brown argued that Obama’s “budget gimmick” of shifting money from general revenue to pay for the lost payroll tax income makes it seem like the trust funds are “unaffected by this tax cut.” In the long run, he said, “this has the potential to erode political support for the program,” which “starts to look more like a welfare program than a contributory social insurance program.”
Actually, the Social Security Payroll Tax should be around 3.5% of pay (total pay). That is the Entry Age Normal Cost under The Entry Age Normal Cost Actuarial Cost Method, when this methodology is used to advance fund the system, by doing a real annul defined benefit pension valuation--with common stocks being the key asset class.
The Initial Unfunded Past Service Liability still needs to be paid off--just as mortgages are--but this is done through the General Account so that current workers do not pay for past workers as well as themselves.
I estimate that overall we need to put about 50 billion dollars more over the next 40 years to do that and every dollar can be invested in stocks (of various kinds).
Here is more detail.
If you try and fix a major financial problem that has been around a long time, you should first make sure you are not using an accounting system that helped cause The 1929 Stock Market Crash--cash accounting--and use one that replaced it everywhere but in our governments--accrual accounting--and also make sure you do not listen to so-called 'experts'--actuaries whose main interest in these areas is to not fix these systems so they can sell way overpriced products.
The right way to fix Social Security and Medicare will also fix our economy, big time and quickly and in the long run, also fix Capitalism itself, by having ordinary people own a significant amount of stock, collectively, not individually.
Here is the way to fix these systems, beginning with Social Security.
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Au contraire, my friends---to keep Social Security alive you must look at the way it is financed. The financial problems have nothing to do with the benefits, which are meager at best. Pay-As-You-Go gets far too little investment returns to help pay the promised benefits and, in addition, is highly unstable.
It is easy to prove the former--any actuary can easily do it, but I am the only one talking. Actuaries have enormous conflicts of interest and have never successfully dealt with them.
We need to replace PayGo with Actuarial Advance Funding, done with an annual pension actuarial valuation and also pass strong laws with teeth to protect the assets, and define correctly how benefits accrue and then prevent any cut backs in those past service accrued benefits.
I have done hundreds of pension actuarial valuations and seen the results of thousands of others and can vouch they work exactly as advertised in sharply reducing costs and in stabilizing pension systems.
As far as the laws are concerned you can Google me--Andy Lang actuary--and find two letters I sent, one to the IRS on the absurd way benefits presently accrue, whose values are heavily backloaded-- a trillion dollar scandal, few know about and even fewer understand---and how you fix it, and a second one to the NLRN on why taking assets from pension plans weakens them enormously, usually leading to their termination.
#1 Posted by Andy Lang, CJR on Tue 21 Feb 2012 at 08:48 AM
PS: I am a 72 yr old actuary, who unlike my fellow actuaries, speaks the truth.
When it comes to fixing Social Security and Medicare, this truth is that actuaries invented the right way to fund these systems way back in 1915 with the very first independent pension consulting actuary--a man need George Buck---and the roots of this methodology goes all the way back to 1762 in Britain, nearly two and half centuries ago before we were even a nation.
When you can forecast cash payouts in the future that increase exponentially and need to be made, the solution is to forecast them realistically, present value them, using an interest rate that can be earned on the fund long-term and then spread this present value in the future as either a level dollar amount or a level % of pay, or both, and this simultaneously levels the cost while also reducing it.
The reduction is very large and comes from what I used to call, 'the miracle of compound interest' and what Einstein once said, is 'the most powerful force in the universe'.
I have been saying this for 47 years now, since 1964 when I took a test on the subject and first learned we were not funding Social Security correctly and it would eventually collapse, unless we did. The following year when Medicare was passed I said it too needed to be advance funded to be successful.
You may contact me here, andyclang@comcast.net.
#2 Posted by Andy Lang, CJR on Tue 21 Feb 2012 at 09:17 AM
The nation uses an awful accounting system called 'case accounting', a system that was a principal cause of the 1929 stock market crash.
It was replaced in 1934 for all public firms by accrual accounting and this system would also be used by many large non-profits voluntarily ask well.
When trying to figure out why we have never fixed Social Security or Medicare, despite knowing exactly how to do it for 95 years, it would help if we used a sound accounting system.
How can you possibly fix a major financial problem when you do not have decent financial information?
#3 Posted by Andy Lang, CJR on Sun 20 May 2012 at 08:10 PM