On Social Security Payroll Tax Cut as a Hidden Threat to Social Security

If you haven’t seen it yet, please read The End of Social Security by Nancy Altman. A brief part:

…Given that unwillingness to raise taxes by less than a nickel on every dollar earned over $1 million, I find it unfathomable that a more conservative Congress, in two years, in an election year, will increase the payroll tax by 2 percent on the very first dollar, and every other dollar up to the cap, earned by virtually every single worker in the country. Consequently, I think we have to assume that the payroll tax holiday will be extended beyond the two years the president is proposing and quite likely could become permanent.

That means that the federal government will have to continue to transfer $120 billion to the Social Security trust funds each and every year even as it has to transfer more and more interest payments as the trust funds continue to grow and as interest rates return to more normal levels…

FDR recognized that a visible dedicated contribution makes it both politically and morally difficult for future politicians to cut Social Security. When pressed about the impact of payroll taxes on the economy, FDR said:

“I guess you’re right on the economics. They are politics all the way through. We put those pay roll 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. Those taxes aren’t a matter of economics, they’re straight politics.”

…Today’s Democrats fail to understand the program, and so are not only blind to subtle assaults against it, but seem to conspire in those assaults. All I can say is that with the Republicans and the Democratic President, perhaps unwittingly, conspiring to destroy Social Security, the American people don’t stand a chance.

It’s clear that it would be an ugly battle to raise this payroll tax in 2012 when unemployment will likely be 8%+. If we took $120bn out of the general fund and put it in the “Making Work Pay Awesomer To The Extreme” fund that mailed out checks it could be set up to have similar effects without setting up a mistaken understanding that Social Security was being raided to pay for a stimulus program. (We could also created an infrastructure bank with that $120bn….)

Because the talking points – “Unemployment is still record high, above 9.0%, even though you liberals blew another trillion dollars on a second stimulus package. Even worse, you did it by volunteering to make Social Security even less solvent in your bizarre stimulus schemes” – are on the way, and I don’t want to be the person whose arguments are conditional on a sophisticated public understanding on the role of the general fund reimbursements to the trust fund.

I wasn’t sure how worried to be about this until I saw Ryan Grim’s Tax Cut Deal A Hidden Threat To Social Security article, where he finds Republicans more than happy to frankly explain how this will become permanent, and how it’ll be used to jump start a conversation about Social Security reductions:

….”Once you bring a rate down, if it goes back up, people will feel that. They’ll feel their paycheck being less and that argument” — that letting it expire amounts to a tax hike — “eventually is bound to be made,” said Sen. Mike Johanns (R-Neb.).

“There’s always a tendency to continue those things… Once something comes in, it’s very difficult to change it,” said Sen. George Voinovich (R-Ohio.) He then volunteered, without prompting, that “It would be detrimental to the Social Security system, especially when it’s in bad shape.”

“There’s always a tendency to continue those things… Once something comes in, it’s very difficult to change it,” said Sen. George Voinovich (R-Ohio.) He then volunteered, without prompting, that “It would be detrimental to the Social Security system, especially when it’s in bad shape.”…

Lamar Alexander, the Senate’s number-three Republican, also said that reform of Social Security should be tied to moving that tax rate back up. “My personal hope is that it doesn’t become permanent unless we deal with a way to make Social Security solvent over the long term,” he told HuffPost. “You have to remember, the payroll tax funds Social Security and I like the idea of a lower payroll tax contribution, but we’ve got to make sure Social Security is solvent, which we should be doing this next year as the first order of business.” The way to make the program “solvent” and keep taxes low, of course, is to reduce benefits.

I’m worried because the two things that need you need to believe in order to not be worried – (1) that the public will have a sophisticated understanding of the financing of social security that will not be cynically manipulated by billionaires and Republicans and (2) that Obama and the Democrats are going to do a much better job negotiating tax hikes next time – are things I do not believe.

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8 Responses to On Social Security Payroll Tax Cut as a Hidden Threat to Social Security

  1. pebird says:

    Perhaps. Greenspan and Congress got a tax hike on Social Security in the 80s, times were different then and I am not saying that was a good thing.

    The public needs to understand that deficit spending is not necessarily a bad thing (depending on what the government spends the money on). Hanging on to old mechanisms may work, but we are going to have also be more nimble and address the issues straight on.

    Having said all that, the net effect of the tax plan is a very, very moderate stimulus – IMHO according to plan. The system cannot fail but cannot grow, because it will then collapse.

    What a coincidence that the latest Fed Chairman is a historian/analyst of the Great Depression. You would think that those who supported his candidacy almost knew what was coming.

  2. Joe says:

    I think exactly the opposite is true. All the Republican efforts to cut social security benefits are designed to be opaque. You need a sophisticated understanding of Social Security to work out how indexing benefits to longevity, using chained CPIs and progressive price indexing work.

    If you cut the payroll tax permanently by 2 percentage points, you double the long-term deficit overnight. ( if we raise the payroll tax rate by 2% today we eliminate the 75 year deficit) You bring forward the date of trust fund exhaustion dramatically, and you can make the case that it will require cutting the benefits of existing beneficiaries soon. By 2015 every dime of tax revenue will go to pay benefits, There will be no surplus tax revenue. This will make that situation worse. There will be a one to one connection between the proposal to make it permanent and taking money out of grandma’s purse.

    A vote to make it permanent would be a vote to not just end Social Security for future generations, but to make today’s senior poorer, which is why it would never get by the legislature and it will never get past a presidential veto.

  3. Pingback: Links 12/10/10 « naked capitalism

  4. drfrank says:

    Thank you for posting this. I’ve often cited FDR’s statement as a way of describing what he had and Obama lacks. And, in addition to the points made above, Obama’s payroll tax reduction deal opens the door for the damn politicians by breaking down the idea that Social Security is a pension plan to which people make contributions. Even the wealthy feel they are entitled to receive SS benefits because they have made these contributions over a lifetime. Really, when you think about it, it is amazing the Social Security is not now means tested. More, the scandal about Social Security, is not that the system is broke or that the deficit matters, it is that the current level of payouts are insufficient to provide a decent standard of living for elderly people who are not able to provide for themselves. It was originally an extension of unemployment insurance, another depression era innovation that is in danger. At current levels, Social Security checks for a working class person are about enough to manage, hand to mouth, if you share the rent in a trailer park in Davenport and get food stamps and Medicare.

  5. If you want a better understanding of Social Security funding, read Ten Reasons to Eliminate FICA

    Rodger Malcolm Mitchell

  6. Joe said, “If you cut the payroll tax permanently by 2 percentage points, you double the long-term deficit overnight . . . You bring forward the date of trust fund exhaustion dramatically, and you can make the case that it will require cutting the benefits of existing beneficiaries soon. By 2015 every dime of tax revenue will go to pay benefits, There will be no surplus tax revenue. This will make that situation worse. There will be a one to one connection between the proposal to make it permanent and taking money out of grandma’s purse.”

    Joe does not understand Monetary Sovereignty If he did he would know that:
    1. The misnamed federal “deficit” merely is the government’s method for creating money and is necessary for economic growth
    2. If there were no federal deficit there would be no money in the economy.
    3. Federal taxes do not pay for federal spending. There is no connection between federal tax collection and spending.
    4. “Grandma” will not pay for federal spending, just as Joe does not pay for the Reagan deficits.
    5. The federal government’s finances are different from yours, Joe’s and mine
    6. Joe suffers from Anthropomorphic Economics Disease

    Rodger Malcolm Mitchell

  7. Michael Logan says:

    Dear President Obama,
    On New Year’s Eve, and on national t.v., mention how you seem to have misplaced the leglislation on extending all tax-cuts. Republicans nationwide will get smashed in delight of your imminent 2012 defeat, and will of course be eminently hungover on New Year’s day.

    On this sore but happy first day of the year for republicans, announce on national t.v. your sponsorship of new legislation, which introduces tax cuts on the first $250K made by all Americans, including the wealthy. (I mean, you don’t want only the poor to benefit unduly on the first $250,000 of their income, have they earned it?).

    The general effect will be a simultaneous cognitive dissonance cascade, as millions of republicans dash madly for the porcelain. I call this the Reverse Double-Mao, named for Chairman Mao Zedong, who was once quoted to have said on taxes:

    “How does one get the people to pay taxes? It is like getting a cat to each chili. Simply rub it onto the cat’s ass, and it will be glad to eat it!” *

    Republicans rooting for Obama’s demise now have to root, against.., Tax Cuts? They would have to eat their favorite soup, made in the Democrat’s kitchen, while smiling and grinding their teeth.

    What is both funny and sad here is that the above idea is both too naive and too Machiavellian for our current batch of politicians.

    • Michael Logan says:

      each -> eat, (my noob is showing). plus the * was to reference the obscure little quote calendar it came from. Perdòn.

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