By Joe Boyles
The president has been beating up Republicans lately, urging them to pass his payroll tax extension “that would mean a thousand dollars more in the pockets of working-class Americans.” So, Barack Obama is running as someone who wants to cut taxes and Republicans are the Grinch. Huh; what’s this all about?
There are several different payroll taxes that employers withhold from their workers paychecks to pay for government-mandated benefits. The one that Obama is talking about is FICA – the Federal Insurance Contributions Act that we commonly refer to as Social Security. If you look on your pay stub, you’ll see where FICA taxes are withheld and how much that is.
The tax rate by law is 12.4 percent on the first $106,800 (the current cap) of wages or salary, half contributed by the employer and the other half by the employee. Last year the employee contribution was reduced by 2 percent. This reduction is what the president is saying should be extended for another year.
He makes the argument that this will leave more money in the hands of working Americans. That’s true, but will it help create more jobs by stimulating the economy? There is no evidence that last year’s payroll tax reduction had any stimulative affect on the economy. Are we trying to do more of the same, hoping for a better result? I thought that was the definition of insanity.
Here’s a really big problem I see with reducing the payroll tax – this is the only method by which Social Security is funded. When we reduce the money which funds FICA, we are gutting the so-called Social Security trust fund and hastening its insolvency.
When I began to study Social Security closely six years ago, the insolvency date was 2042 when the fund’s actuaries predicted that Social Security could only pay 77 cents on every dollar collected. The most recent report says that date has moved forward to 2037. Reducing the FICA tax will only accelerate the date of insolvency. In fact, I predict that until the feckless politicians actually accept the challenge of Social Security reform, the date of insolvency will continue to back up to somewhere around 2024. That’s just 13 years away!
I used the term “so-called” when describing the Social Security trust fund … because it is a mirage. For nearly a half century, FICA collections have gone into the Treasury Department’s general fund, from which Social Security benefits are paid. When there were surplus funds collected, the Congress spent the money on other things and issued promissory notes to the Social Security Administration at less than 2 percent interest.
Since we’re now paying out more benefits than receipts (otherwise called negative cash flow), those promissory notes are slowly being redeemed, adding to our federal debt. This will accelerate as more and more of the 70 million baby-boomers reach retirement age and begin to receive benefits. The “trust fund,” or lock box as Al Gore called it, has a hole in the bottom. It is a figment of the imagination of a crafty politician.
Politicians of both stripes are falling over themselves to approve the payroll tax reduction; most of the squabble is how to pay for it. You know, if we continue to approve these “temporary extensions,” pretty soon, they’ll become permanent. That would propel Social Security into an even finer mess than it is today!
This matter conflicts me. As you probably know, I’m a tax cutter, so I like the idea of Americans keeping more of the money they earn. But I lose sleep over the mess that is Social Security. I don’t want to see it get in more trouble than it already is. So many elderly Americans are totally dependent on Social Security. I hate to see their retirement put at any more risk.
My beef with Social Security is that it is a Depression-era social insurance program that badly needs updating for 21st Century economic realities. We are 75 years removed from its invention and we can do better. The reform needs to protect those who have planned their retirement around the program. And we need to keep the grubby hands of the politicians off the money. To my way of thinking, these are reasonable goals.