Payroll-tax break might alter thinking on Social Security
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There is an outdated yet widespread belief that Americans receive in retirement what they paid for during their working years.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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71 comments Add your comment
left wing
December 9th, 2010
11:18 am
This is all conservatives have ever wanted; a chance to destroy Social Security.
Instead, why not correct the imbalance by raising the limit on income subject to the payroll tax (and for the record, yes, I would be affected by this). Currently the limit is $106,800). If we’re defining rich as $250,000 (which I think is too low) then certainly the cap on income subject to the payroll tax should at least extend that far.
In fact, I’ve never understood why the cap on income subject to the payroll tax was necessary. Treat all income equally and allow the tax to apply to all of it.
left wing
December 9th, 2010
11:29 am
A Patriot –
A Ponzi scheme is an intent to defraud people. It implies a deliberately illegal act with someone profiting.
The federal government is neither engaging in illegal activities nor is it defrauding anyone.
However, if you can be suckered into believing this, you may be a candidate for some future fraudulant scheme.
CJ
December 9th, 2010
11:30 am
2010 OASDI Trustees Report (August 5, 2010): “Social Security’s combined trust funds are projected to allow full payment of scheduled benefits on a timely basis until the trust funds become exhausted in 2037.”
http://www.ssa.gov/oact/TR/2010/II_conclu.html#86802
Anybody who asserts that Social Security is a ponzi scheme has been duped. Ironically, they’re typically the same people who voted against the guy who campaigned in favor of a Social Security lock box in 2000 and for the guy who more than doubled our national debt and threw our economy into a tailspin, thereby reducing revenues allocated to Social Security.
Agian, there is no crisis. The program is funded for over 25 years and easily extended, without benefit cuts, with a simple tweeking of the current cap if not an all out elimination of it. Of course, the sooner we tweek, the less tweeking that will be needed in the future.
This rationalization that we’d be looking out for future generations by cutting security (i.e., private accounts) and benefits for future generations is bizarre.
A Patriot
December 9th, 2010
11:41 am
left wing
“The federal government is neither engaging in illegal activities nor is it defrauding anyone.”
Amazing.
Kyle Wingfield
December 9th, 2010
11:43 am
Here’s what the S.S. trust fund looks like, CJ: http://www.youtube.com/watch?v=7GSXbgfKFWg
Today, we are all Mr. Samsonites.
Wise Just Moderate
December 9th, 2010
11:44 am
I love Government! It is the framework through which all advancement in human civilization has been achieved. It can certainly become something bad, it’s what we choose to do with it. Above all it must remain of, by and for the People.
Big business and religion have their roles but it’s all about the big “G” baby. The cronies of these minor institutions are pushing like never before to weaken the Government. Their motivation is more power over us for their own benefit. Effective governance is in the way of those ambitions. Chief among them is cheap labor and prayer in public schools.
America is 300 million people, not one political party or another. Most don’t even vote regularly and are low and middle class socio-economically. That collective will never allow business and religion to corrupt the integrity of their governance. Been there and done that. They know from history and common sense that Government must be strong and effective while being tempered by transparency and accountabiliy.
Atlas can shrug if he wants but he’ll learn very quickly that it’s not all about him. He’ll find that he’s just a child in his parents house, a little too big for his britches. The rod will not be spared I suspect. (we’re cool with all the great sayings but keep the religion out of our governance)
Happy Holidays everyone, and I do mean everyone!
Fix-It
December 9th, 2010
11:48 am
Left Wing;
“A Ponzi scheme is intent to defraud people. It implies a deliberately illegal act with someone profiting.
The federal government is neither engaging in illegal activities nor is it defrauding anyone.
However, if you can be suckered into believing this, you may be a candidate for some future fraudulent scheme.”
What do you call it then when somebody takes your money and says I will hold on to this for you, and they spend it? What does a liberal call that?
left wing
December 9th, 2010
11:51 am
A Patriot I understand. You think that anything you disagree with or don’t understand must be illegal.
You have a myopic view.
The fact that social security intends to pay benefits to everyone shows that there is no intent to defraud. And there is nothing illegal about the federal government providing social security. Offhand, I can’t name an OECD country which doesn’t have some form of government provided retirement. Can you?
Take the tin foil hat off.
left wing
December 9th, 2010
12:01 pm
Fix-It somebody promising that would be running a Ponzi scheme, as per your slanted question there is an intent to profit and defraud someone else.
As I just explained to A Patriot the advanced countries all have their own forms of social security. Here’s a list:
http://www.oecd.org/document/58/0,3343,en_2649_201185_1889402_1_1_1_1,00.html
You say they spend it. So how did the social security trust fund come into existance?
CJ
December 9th, 2010
12:06 pm
Kyle @11:43,
That scene is hilarious. But is the implication that the United States is likely to default on it’s debt? If the newly elected Tea Partiers in Congress have any say about it, then you may get your wish. Otherwise, that’s out there.
left wing
December 9th, 2010
12:14 pm
CJ Don’t worry about deficits and the debt. According to Dick Cheney, “deficits don’t matter”
http://www.forbes.com/2009/08/04/deficits-spending-gdp-intelligent-investing-cheney.html
Fix-It
December 9th, 2010
12:16 pm
Left Wing;
so let me see if I got this correct, the government takes my money spends it on anything except social security, which it was taken for, then to make up for their reckless spending; they print more money. Which devalues our money, so where is the upside? By definition of the law SS is a Ponzi scheme.
Swede Atlanta
December 9th, 2010
12:19 pm
Ref A Patriot 11:14
I am all for making a government-sponsored retirement program optional but what do you propose to do with people like myself who have been paying into the system as it exists today and have planned for at least some form of SS annuity benefit as part of my retirement. I have been saving 8% for the past 20 years and have about 10 years to go but I have assumed I would have at least some substantial part of calculated SS benefit as part of my retirement.
For me the difference might be between eating a brand name dogfood and a generic but for millions of then-to-be seniors, it would be a choice between having a roof over their heads, any food on the table and medicine.
It is easy to call for “repeal” but you provide no ideas on how we get from a system where people are paying in now for people drawing the benefit now to a system where those that pay in take when they retire and those that don’t are left to their own devices.
JF McNamara
December 9th, 2010
12:21 pm
Kyle, its not a pile on solution. I know that we will have a issue again if we don’t reintroduce population growth or other meaningful change.
I’m about the same age as you, and I’m also making other arrangements. The problem with that is that I’m paying double. I’m paying for something I won’t get plus saving what I need. Why are we the only generation that’s getting screwed?
If you bump up the 1.5%, you make those retiring soon bear some of their own burden. What’s wrong with that? It amounts to the greedy a** baby boomers knowing about the problem for 20 years but refusing to pitch in one additional dime to help me out. If they hate the 1.5% tax or if we push less benefits on them right now, I don’t care.
Since I’ve had to earn pretty much everything I’ve got and won’t get a Richie Rich package from my boomer parents, I have no sympathy for those putting me in this position.
Prudent Man
December 9th, 2010
12:23 pm
“The fiction that these “investments” can’t lose is based on the idea that the U.S. government will make good on any revenue shortfalls and pay out all the benefits. As long as the U.S. government isn’t overly indebted, that may be true. But how much longer can we keep that up, given our trajectory?”
According to ssa.gov the SS trust will be exhausted by 2037-2041 the way it is currently funded. Govt is overly indebted now and has been for several decades, but has never missed a SS payment. When a private gov’t treasury account loses money, that private entity cannot tax to make benefit payments. Some private treasury funds are FDIC insured, but even an insured fund has a lower credit rating than full faith and credit of the federal govt. Plus the return on insured treasury funds has not outpaced inflation, unlike SS.
SS investment, treasury bonds, are indeed “investments.” Investment, by definition, means that it can lose money, one only hopes it will gain, but there is never a guarantee. Since it’s inception, SS has not lost. But like all investments, past results are no indication of future performance. Unlike identical government treasures available in most pension funds in the form of money markets, SS funds are backed by the FF&C of the federal government. That seems to bother conservatives for some reason, but FF&C of the federal govt. is a lower risk than even an FDIC insured bank account.
Investors should consider their pension funds based on their retirement age with and without SS being available. Someone who thinks SS won’t be available might be better advised to hold a larger money market position. Someone who believes SS will be there may feel better about putting more money into stock or corporate bond funds with higher potential return. Ideally, SS money should be pocket change in retirement while the pension fund continues growing. Every withdrawal and fund sale costs the pension money. SS can help prevent those transaction costs by providing steady cash flow. Nobody has ever gotten rich on SS, but millions have watched their pensions and 401k’s go belly-up overnight. In fact, everybody is still recovering from the shock when it happened in ‘06. SS is there for when it happens.
Beware of any investment advisor who claims an investment will not lose money or value. The only guarantee a private investment account can make is that the fund WILL lose money. Lastly, most who do not contribute the maximum amount to 401k, IRA, and Roth IRA seem to be the same crew wishing SS would be destroyed. These people will be the first one’s crying to the gov’t when they are old and broke.
left wing
December 9th, 2010
12:27 pm
Fix-It You never answered my question: You say they spend it. So how did the social security trust fund come into existance?
And someplace in your runon sentence, I saw an accusation of “printing money. Which devalues our money, so where is the upside? “ You do realize that this has nothing to do with social security? Not that I understand what you’re complaining about, but it has nothing to do with social security.
But if you’re sure it’s a Ponzi scheme, please, by all means, file a lawsuit against the federal government to stop social security. The country could use a good laugh right about now.
See, the people you get this from (the Limbaughs, the Becks, et al) may tell you this, but they know better. If they really thought it was illegal, they’d challenge it in court, like other republicans are trying to challenge the health care in court (and losing, BTW). They feed you this, and you believe it. WC Fields was correct when he said “a sucker is born every minute”.
Jefferson
December 9th, 2010
1:33 pm
New boss, same as the old boss.
left wing
December 9th, 2010
1:40 pm
I’m not hearing any of you say what a great idea that is. Come on. If you think social security is a Ponzi scheme, then sue the government to stop it. Make it a class action suit.
Where is everyone? Bueller? Bueller?
You pontificate (or listen to blowhards pontificate) about this. I’ve seen it before here and/or in Jay Bookman’s blog. Put up or STFU.
dale coberly
December 9th, 2010
4:21 pm
it is tragic the amount of misunderstanding of SS on this blog, and, lo, young kyle leads the rest.
i wish you all luck with your “voluntary” retirement plans. but when you call SS a ponzi schere you show your complete ignorance about both SS and ponzi scheems in general. And when you complain that “the money has been spent” you show complete ignorance about the nature of money and banking.
btw, SS had to be compulsory because the people are too stupid to insure their retirements without a little compulsion and there are always snake oil salesmen like kyle to encourage them.
fact is that Social Security gets no money except what the workers pay in, and the workers get all of their money back plus interest. if those workers are going to be living longer they will need to save a little more for their retirement. the safest way to save is SS. and the little more they will need to save amounts to about forty cents per week each year. those are CBO numbers, if you know how to do arithmetic. but good luck with that sure thing on Wall Street.
If you don’t read Kyle Wingfield, you should « ……..GA Jim
December 10th, 2010
8:39 am
[...] is refreshing to read him in the Atlanta Journal. I may not always agree with Kyle but he does a great job of laying out his views and I don’t ever remember him taking a position that wasn’t consistent with conservative [...]
Left wing management
December 10th, 2010
5:15 pm
“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.”
Ah, so you’re not above viewing a tax policy, in one of its functions, as an instrument to help educate the public fiscal management. Interesting, considering the scorn you heap in your other post on Democrats’ ire over their president’s failure to use the current showdown over tax extensions for a very similar purpose – and their apparent resolve to risk allowing Bush tax cuts to expire on even the middle class, just to make a point.
“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?”
But why do we need an individual account so badly in the first place? Where does this mania for the individual come from?