I am not an economist, I have no mathematical models or sophisticated programs to project anything. However, I do have a great deal of experience dealing with people and their perceptions about money, retirement, savings and health care. For this modest reason alone I must question the wisdom of another cut in the Social Security payroll tax. What gives me the first clue of concern? It’s the spin. Read the papers and you will see that for 2012 the Obama jobs proposal will cut the employes payroll tax in half. For example:
“The President asked for a $175 billion one-year extension and expansion of the employee payroll tax holiday now in place, halving the tax rate to 3.1 percent in 2012.”
Here’s the problem, the payroll tax is already cut from 6.2% to 4.2% in 2011 so a further reduction to 3.1 is not halving the tax but reducing it by 26%. In addition, the results of that “stimulus” are hard to see. Did you even notice the difference in your pay, what did you do with this windfall? A further cut to 3.1% will add about $10.50 a week (before taxes) to the average family’s income. Will this stimulate your spending? And, keep in mind this plan has no impact on the spending by one sixth of the population that is retired and collecting Social Security today. Despite the perception of all-encompassing poverty, this group has a great deal of spending potential.
In addition, the 2012 plan calls for a tax reduction for employers under several conditions.
This reduction in Social Security payroll tax will cost the Social Security trust fund $240 billion. Or, you can accept this estimate:
The tax cut would cause a $289 billion loss in Social Security revenues, which would be replaced by general tax revenue funds transferred from the Treasury.
Social Security is already short $49 billion a year because of higher benefits and lower payroll taxes. In the past the incoming taxes were more than enough to pay benefits. That is no longer the case.
Under the Obama jobs plan general revenue would replace the lost revenue to the Social Security Trust Fund by issuing more Treasury Bonds (debt) which would be offset by higher income taxes on the “wealthy” or under the Reid plan, just on real millionaires. You can be sure these additional taxes will not be temporary for the length of the payroll tax holiday, so now more taxes are in the mix to be spent in the future.
This plan would put an end to the myth that Social Security has no impact on the budget or deficit.
But the real unanswered question for me is what happens at the end of 2012? Once Americans have become accustomed to this extra cash in their pockets, how will they react to a 3.1% cut in pay when the tax is restored, a cut larger than most pay raises (if any) given in a year. Have our policymakers thought of that?
Will people then reduce their spending, cut retirement savings, hide more of their income or simply Occupy Pennsylvania Avenue? Will employers retain the people they were encouraged to hire when their tax break ends? Even worse is the possibility that gutless politicians will not have the nerve to reinstate the tax thereby assuring that Social Security falls into the abyss of the federal budget. There are worse possibilities of course like politicians convincing people that the shortfall should be permanently shifted to Wall Street and all those millionaires and billionaires who don’t pay their fair share thus making certain Social Security become the largest of welfare systems.
The bet is that by the end of 2012 the economy will improve, more workers will be on the job paying Social Security and other taxes, more spending will occur and all the rest that goes with a recovery. Given that the 2009 Economic Recovery and Reinvestment Act and the current tax holiday seem to have had minimal positive outcome (I know, it saved jobs), this all seems like a risky bet to me.
Let’s hope it has been well thought out beyond November 2012.
- Some see danger in changing Social Security’s funding (msnbc.msn.com)