The other day I saw a rather shocking story, claiming that the Social Security Administration will not take in enough money this year to pay the benefits that are owed. I was initially shocked because I didn't expect that milestone to be passed for some years at least. Then I realized there was a reason: the disastrous 2% payroll tax cut that President Obama included as part of the deal with the Republicans in December. A few quick numbers will explain what has happened.
A 2% cut doesn't sound like much, because we instinctively think of it like a 2% cut in our income taxes. The problem, of course, is that many of us pay a marginal income tax rate of 30% or more, while the payroll tax brings in 12.4% of the first $106,000 everyone earns. The cut was a 30% cut in payroll taxes for each individual, and a 16% cut in the government's income from payroll taxes. And in 2009, the government's revenue from Social Security--$889 billion--was almost identical, incredibly, to its revenue from personal income taxes, $915 billion. Corporate income taxes brought in just $938 billion. The 16% decline in social security revenues will add up to $142 billion dollars of additional deficit for each of the next two years. Meanwhile the Republicans are threatening to gut the discretionary spending of the federal government to save $100 billion a year. And the nightmare with which the conservatives have been threatening us--the deficit in the Social Security system itself--is here, years ahead of schedule, because of this disastrous measure.
Senate Democrats are promising to pay the benefits owed, but that means more borrowing when we cannot afford it. Meanwhile restoring the income tax to a more reasonable share of our revenue has been delayed again. I have no idea--and would appreciate any data any one can give me--where this idea came from and what on earth moved the Obama White House to go along with it. It's true that Social Security is our most regressive tax, and this was the only way to cut taxes on genuinely poor Americans who still hold jobs. But it was a devastating blow to our most reliable social program, and I am afraid the consequences may be severe.