This week’s typical Washington compromise on taxes has been accompanied by typical Washington drama: about who won and lost, about whether President Barack Obama had a meltdown when he called Republicans “hostage takers” and his Democratic critics “sanctimonious” and “purist.”
Whatever. I prefer that tax rates stay low, but the fact that the extension of current income tax rates was for only two years just goes to show how fleeting these decisions are. If there’s one piece of the package that could lead to bigger, more far-reaching changes down the road, it’s the one-year payroll-tax reduction.
I don’t mean big changes in job creation. The 2-percentage-point cut comes out to about $1,000 on a $50,000 salary next year, totaling some $120 billion nationwide. But it is probably too temporary to spark a real employment surge.
No, the more significant impact is changing the way we think about Social Security.
There is an outdated yet widespread belief that Americans receive in retirement what they paid for during their working years. The actual linkage between taxes paid and benefits received is much looser.
Washington doesn’t sock away the tax revenues for later, much less put your payments in an account with your name on it. My payroll taxes fund today’s retirees; in theory, today’s toddlers and the as-yet unborn will pay for my future benefits.
The younger and more demographically aware you are, the more problematic you’ll find this pyramid scheme.
Already, with the first wave of baby-boomer retirement just now hitting, Social Security has gone in the red several years earlier than expected. The recession didn’t help, and the program is projected to be back in the black by mid-decade. But only for a few years, after which the shortfalls will get progressively worse.
So, how could it help matters to have a one-year reduction of Social Security revenue?
From a budget standpoint, it doesn’t. But a key to reforming Social Security is making people realize it’s an unsustainable entitlement program rather than the pay-as-you-go Old-Age and Survivors Insurance it was intended to be.
As crazy as it may sound, reducing the tax without enforcing a corresponding drop in benefits might help do that.
That supposed link between payments and benefits? It won’t exist in 2011. Guess what? It doesn’t exist today, either.
When there’s a funding shortfall, Washington doesn’t tell pensioners, sorry, there’s no more money. It closes the gap with other tax revenue.
That’s what was going to happen this fiscal year before the payroll-tax reduction, that’s what will happen due to the payroll-tax reduction, and that’s what will happen in future years when Social Security’s numbers don’t add up.
Maybe a one-year tax break will help more people better understand our grim situation, particularly those of us old enough to see that we’re going to get squeezed but young enough to make other arrangements.
If so, there may be an opportunity for a one-year tax break to grow into something else.
Why make us go back to paying that 2 percent of our income into Social Security in 2012? Why not let people below a certain age put that 2 percent, maybe even more, maybe even some of our employer’s share of the tax, into a true individual account?
In exchange, we would agree to forgo some future benefits. There would probably also have to be broader changes to Social Security benefits for others. Guess what? That’s going to happen one day anyway.
We can continue to make this a future generation’s problem, letting it grow until some future generation will find it impossible to solve. Or we can use this precedent as a launching point for real reform.
– By Kyle Wingfield
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