Government

Social Security payroll tax cut for 2012 is a risky bet and not all it appears to be

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.

Installation of a sidewalk in Middletown, Rhod...

The sign maker had employment stimulated

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.

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12 replies »

  1. If the payroll tax cut is not extended, I suggest you make the tax cut for yourself by cutting your needless and wasteful spending by the amount of the tax cut. The cut is 3.1% of your wages, up to $110,100. The tax cut could be $1,000, $1,500 all the way to $3,300. Here’s how to do it:

    1. Cut your cable subscription to “basic”. We did that a few years ago and have saved $900 per year.
    2. Cut your dining out and bar room tabs by going out less often and eating [and drinking, if needs be] at home. You will be shocked…shocked by how much you save. You could save the entire tax cut on this item alone.
    3. Stop buying all the junk you buy at malls. Consumer goods sold in this country have fallen terribly in quality and are for the most part cheap plastic junk made by child slave labor in third world countries.

    Who do you think owns the businesses that sell this junk to you? It is the 1% we keep hearing about. RICH PEOPLE DON’T BUY THINGS…THEY SELL THINGS…TO PEOPLE SUCH AS YOU. Your continuing to buy this junk is what keeps you in the 99%. You keep yourself poor.

    Put your savings into an IRA and resolve to keep doing this, year in, year out. How do you like being broke all the time? Being broke is not only embarrassing and inconvenient; it can be fatal.

    I’ve been an attorney dealing with trust and estate clients for over 30 years. I’ve seen the habits of wealthy people. I’ve seen how they’ve got and remain wealthy and I share some observations with you.

    Remember: A. Rich people don’t buy things, they sell things.
    B. There is no future whatever in spending money but there is a splendid one in saving and investing it.

    Good Luck.

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  2. If I don’t know anything else, I know that, if the 3.1% payroll tax cut proposed by the Obama administration is not passed, i will cut my personal spending by 3.1% of $110,100 or $3,413 and put it into my IRA or otherwise invest it in a way that I still have it come Monday morning. There was never much future in spending money and now the only future is in saving it.

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  3. Although I appreciated the 2% “raise” I got from the last tax cut, I could not then, and do not now, understand how it makes fiscal sense to reduce the funding to a program that is in such financial trouble. In the words of George H.Bush, “That’s fuzzy math”

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  4. You observed that the Obama proposal of “a further reduction to [a rate of] 3.1 [per cent] is not halving the tax but reducing it by 26%.”

    That may be its reduction, but your observation isn’t dealing with the proposal, which stated it would cut the tax rate in half . . . and that rate cut in half would indeed be accomplished by a tax rate of 3.1 percent.

    Trying hard to criticize is one thing, but it’s best done when the straw man is left out of the logic.

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    • The current rate is 4.2. That is what people are paying today. The proposal is to further lower ther rate to 3.1%. If you go to 3.1 from 4.2 are you cutting the rate in half?

      If you went from 6.2 to 3.1 you would be cutting the rate in half, but most of that was accomplished in the 2011 proposal.

      What they are saying is the same absurd logic promoted when it was said that allowing the Bush tax rates to contine was a tax cut for some people.

      When you change from one state to another the difference is between those two not some previous third state.

      It’s spin and certainly saying your tax will be cut in half sounds better than what is actually happening which is a further 26% cut in the payroll tax.

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      • Sorry. The permanent tax rate remains at 6.2 percent. A temporary reduction in that rate is in effect, to 4.2 percent. The proposal would indeed alter the current temporary reduction to become half of the permanent tax rate; i.e., to become 3.1 percent.

        Of course, the propsal would reduce the current temporary reduction by only 26 percent, as you have noted.

        The adminstration’s quote is thus spin, and equally so your observation of that quote. Both you and the administration’s quote are very clear on how differently you’re describing the same thing. The truth of the matter isn’t what you’re het up about – it’s the spin on the matter.

        No problem – that’s what blogs and politicians do.

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      • Isn’t that what I said. It’s spin. I was not trying to spin anything. Merely point out that people come 2012 would not receive a 50% tax cut as they have most of it already.

        Dick

        Richard D Quinn Editor Quinnscommentary.com

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