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Friday, February 04, 2011

The Social Security disaster

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.


Anonymous said...

Yet another brilliant idea from Harvard educated Summers, among other people.

“What came out of the compromise was the idea of
the payroll tax holiday, which, frankly, a huge
number of economists and other experts had been
talking about over the last two years with a lot of
support in both political parties,” said Larry
Summers, Obama’s chief economic adviser.


Anonymous said...

The plan was the Administration's idea. Read below.

"Under the plan, the Social Security payroll tax on
individual wages would be lowered to 4.2% in
2011, from the current 6.2% rate.

A worker earning $70,000 would pocket $1,400 as
a result of the tax cut. Social Security taxes apply
only to the first $106,800 in wages, so the benefit
for high earners tops out around $2,100. The
employer share of Social Security taxes would not
be affected.

Obama administration officials say there would be
no effect on Social Security benefits or long-term
solvency. But the government would have to borrow
to make up the lost revenue to the Social Security
trust fund. The plan's detractors say it would
undermine the program and likely become


Anonymous said...

Unfortunately for you Dr. Kaiser, this particular give away was to counter balance the alleged "give away"
to "RICH" (who simply got to keep their own earned money). it was a part of a Democrats' plan to
appease opponents of the continuation of the tax cuts.

You got your fellow alum Mr. Summers to blame for
this one.

Anonymous said...

I have no doubt that it was a concession in a deal to get something else he badly wanted, though I've yet to figure it out, and I'm amazed that reporters never pursued the story.

For my own part, I'm taking every dime of the .2% and putting it in my IRA. If EVERYONE would do that, it would at least help them a little down the line. Unfortunately, the majority of the people, who have little knowledge of finance will simply spend it...something the fat old white rich conservatives are hoping for. That way, they can go back to being the master on the plantation.

I can't imagine why Obama played their game, but whatever the reason, I hope it was HUGE.

One has to wonder, though, how much damage these old men can do to the country in two years.

Larry Koenigsberg said...

This is the first comment that I've seen on the arithmetic of the 2% cut, which I opposed; thanks for it.

Incidentally, I wrote my Congressman and both Senators (DeFazio, Wyden and Merkel respectively) -- that is, filled out their Web forms -- opposing this move on the basis that it would be the fiscal ruination of the Social Security program. They all responded to me without any mention of Social Security at all; their responses were focused on the injustice of sparing the wealthiest Americans from the "shared sacrifice" that will be the lot of the rest of us. Does no one understand the disastrous nature of this payroll tax cut except for the inevitably prescient liberal bloggers?

Jordan Greenhall said...

I continually fail to understand why even folks who are aware of things like Strauss and Howe continue to use highly linear thinking when trying to project what is going on into the future.

If it is correct that we are at a "turning," then the only thing that can be said for certain is that "the times they are a changing". Compare the world of 1868 to 1860 or the world of 1787 to 1775. The magnitude of the change is very large - and I would argue that for a large variety of reasons (globalization, the Internet, etc.) our own crisis will be more substantial than those that have come before.

Consequently, I would be wholly unsurprised to see social security completely disappear before this thing is done. Hell, I'd place odds against the continuing existence of some fraction of current political organizations (the EU? China? the US?). But, in the greater scheme of things, a 2% cut in the payroll tax is but a drop in the ocean.

Barry DeCicco said...

Yes, we can pay for it. What was the cost of extending the Bush tax cuts, counting only the amount for households earning more than $250K?