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September 12, 2011 09:05 PM UTC

Kiss Social Security Good-Bye

  • 37 Comments
  • by: caroman

(But… but… tax cuts INCREASE tax collections! Because Reagan, that’s why! – promoted by ProgressiveCowgirl)

A key component of President Obama’s American Jobs Act is to cut in half the Social Security taxes paid by employees and employers.  This tax holiday doubles down the tax savings already in place for 2011.  

I have one question:  When do you think the economy will be sufficiently recovered for Congress to revoke this holiday and effectively raise everyone’s Social Security taxes?  During a GOP Administration if Obama loses in 2012?  During a second Obama Administration if he wins?

If you, like I, answered “Never”, then you get where I am going with this.  Obama’s plan to cut Social Security taxes will eviscerate the Social Security program.  And, I would argue, to no significant benefit to the economy.

 

First, a few clarifying facts.  Social Security is funded by wage withholdings on all employees which are matched by employers.  If you make $1,000 then $62 ( 6.2%) is withheld from your paycheck and paid to the federal government.  Your employer is also required to match this amount with a payment to the feds.  This happens on all wages up to $106,800.  (The cap has been steadily increasing over the years.)  In 2011, the employee’s portion of SS taxes was reduced by 2%, to 4.2%.  This 2% reduction translates to $20 less tax withholding, and more cash in the pocket of employees making about $50,000/year (or, $1,000/week).  President Obama’s plan is to reduce the SS taxes by 3.1% for employees, AND to also reduce the employer’s share by 3.1%.  So, employees making about $50,000/year would now have about $31 more in their paychecks each week.  Employers get to pocket the same amount.

Observation #1:  If you give a tax break and no one notices, does it matter?  

Raise your hand if you noticed the $20/week increase in your paycheck this year.  Bonus: Raise your hand if you knew that you were given a $400/person Making Work Pay credit on your 2009 and 2010 tax returns.

Perhaps the two biggest problems our economy faces right now are a lack of demand and a lack of consumer confidence.   Now, putting more cash in most people’s pockets is a great idea.  Most people will turn around and spend that money, thereby increasing demand.  And, they will spend that money when they see it in their bank account.  But, I argue that the psychological impact is far less if they get it in $31 drabs or in hidden tax breaks on their 1040’s, than if they got a check in the mail for $1,550.  (Rich people don’t care — those amounts are rounding errors and won’t be spent because they are already spending all they want anyway.)  Giving this type of tax break to employers is also just a waste of money.  They won’t hire any more people at $50,000/year just because they get to keep an extra $1,550.  So, even though the extra cash will be spent by those other than the rich, it does little to bolster consumer confidence when you don’t even realize you got this extra cash.

Observation #2: Tying this tax break to Social Security will destroy Social Security.

It’s true that the federal government has been raiding the Social Security fund to pay for general obligations forever.  But, the concept that we are paying into the SS system via our payroll withholdings and have earned our SS benefits when we retire is accurate.  Cutting SS taxes to allow for more spending today breaks this fundamental principle of Social Security.  And, as I noted above, when will this tax holiday expire and who will let it expire?  The GOP?  President Obama and the Dems?  Please.  We can’t even let the Bush tax cuts for millionaires expire.  So, this temporary tax break that few will notice may cause irreparable harm to the Social Security system.  Frankly, I didn’t think that my President and my Party would be willing participants in Grover Norquest’s vow to shrink government (including Social Security) to a size where it could be drowned in a bathtub.

SOLUTION:  Issue $1,500 Checks to Every Taxpayer, ASAP

Issue a $1,500 check to everyone who had a W-2, or filed a Schedule C (sole proprietorship) in 2010.  Maybe you could limit it to those who had less than a certain adjusted gross income (say, $500,000) in 2010.  How would your attitude (i.e., confidence) be after getting such a check?  I’m guessing you’d feel pretty good and might feel a lot better about most everything.  In fact, since we wouldn’t be giving a break to the employers, maybe we could increase that check to $3,000 for everyone.  Feeling even better?

In summary, President Obama’s plan to cut Social Security taxes is a bad, bad idea.  The relief it provides is too little to be noticed and won’t improve consumer confidence. And, it needlessly imperils Social Security.

Instead, write a large check to every worker in America ASAP and watch the economy improve immediately.

 

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37 thoughts on “Kiss Social Security Good-Bye”

  1. If we’re not willing to pay for Social Security ourselves, what’s left? Well, for one, undocumented immigrants working under falsified identities–they pay social security tax with no possibility of collecting benefits. Why keep letting the identity theft black market subsidize social security when we could openly expand legal guest worker programs and continue collecting those tax dollars?

      1. The last “write everyone a check” stimulus didn’t have a measurably positive effect on the economy that I can recall. Writing everyone another, bigger check might help presidential approval ratings, but I’m not persuaded that it would do anything to create jobs, raise the consumer confidence index, or encourage consumers to resume discretionary spending after the check is gone. I’m open to being persuaded if you have sources that indicate cash rebates are likely to have a strongly positive impact on the economic climate, however.

        If I had $1,500 per American household to spend on improving the economy, I wouldn’t put it in tax cuts for individuals, honestly. That would make me a very unpopular presidential candidate, but I think that temporary tax cuts are simply not cost-effective historically. (Again, open to being convinced otherwise; perhaps I am reading the wrong analyses.)

        1. In June, 2001, as part of the Bush tax cuts, checks were issued as an advance against 2001 taxes: $300/single; $600/couple.

          Here’s a link about the effects of the checks: http://www.taxfoundation.org/b…

          Spending of the checks may have been less than predicted, but if you look at the analysis, it seems that is mostly true about the wealthy.  Low and middle income people spent most of it within a few months.  Also, those are pretty small amounts compared to what we’re discussing today.  Receiving a $1,500 or $3,000 check would most certainly change consumer confidence, at the least, in my opinion.

              1. The two prior cash programs involved a few hundred dollars.  Nothing to sneeze at, and Wal-Mart reported an uptick in sales due to their client demographics. So again, it’s all relative. But yes, it only added incrementally to the economy.

                Cash for Clunkers was a rousing success on the otherhand, directly helping the auto industry as well as the general economy due to the significant sum involved — $3,500 to $4,500.

                So lumping the equivalent of a year’s FICA tax cut into a single check for $1,500, or $3,000 as Caroman suggests above, would be a much more effective stimulus, even if many smart consumers do save some or even most of it for the rainy days we’re continuing to see.

            2. It seems that your citation as well as mine above are inconclusive about the effects.  Your cite relies on personal savings rates that increased after the 2008 checks went out.  Well, those were large checks and most people didn’t immediately spend the money, but very well could have spent it in the next few months.  My citation also had contradictory studies.

              1. There must be at least one way to spend $1500 per American household on something that’s proven to have a measurable and consistent positive effect on key economic indicators.  

                  1. I don’t know the statistics on how much a personal laptop computer boosts grades, but it’d be a good start; and with a bulk buy on the actual laptops themselves, there’d be a lot of money left over to add educational software. Put in a mandate that at least 50% of this software be purchased from small software development companies that do not offshore and outsource, and you have a small business stimulus, too.

                    Of course, there are complexities: If they’re to help with school, do public schools then have to permit outside laptops to be brought to school? And what about the inevitable “Obama gave my children a tool to look up porn” complaints?

                    But it’s creative thinking and an example of how much more can be done with a massive amount of money than just hand it out in check form.

                    1. Remind me not to challenge you to a chess match 😉

                      I didn’t consider this as another “Cash for Clunkers” program, but yeah, you could put an incentive like that (bulk discounts) for families with school-age kids.  The internet filters are getting better, but they’d basically be the same as they have in other public schools.  As always, the best policy is to have the laptop in an open area where adults can monitor kid’s usage.

                      But as I’ve said before, the goal for this bill is fast, fast relief, not nation-building, even if it’s our own.

                    2. I don’t study it, but my pops plays at a grandmaster level, so I’ve picked up a thing or two. I can’t beat him, but I can beat pretty much anyone who doesn’t actually study and do USCF tournament play.

                      On the notion of fast relief — that may be the goal of this bill, but I would posit that even in this case, there are more proven options. Put the extra funding into the job creation side of the bill, even. Adding tax rebates would just be a political move.

  2. We had this discussion earlier about the 2% cut and the concerns were valid then as well.  The problem is that it’s easier to get a bipartisan deal on Social Security for the very reasons you list above, and adjusting withholding rates doesn’t lend itself to lump sum rebates.

    Personally, the only reason I noticed my 2% cut was because I had to adjust my Quicken deposit amount.  However, when I was pleasantly surprised by my company to receive a tidy year-end bonus, you bet I noticed.  And I immediately went out and got a new blue-ray player and energy-efficient LED flat panel TV!  So I get reminded of the extra cash every time I watch a hi-def movie.

    I totally agree, a stealth tax cut will barely be noticed, but the damage to Social Security will be long-lasting, and lead to even more painful tax increases or benefit cuts to correct the shortage in the coming decades.

    1. Hopefully, that tv and blue-ray were made in the USA.  🙂

      But, even if not, the economic turnover of your purchases rebounded throughout the US economy.

      Can we get our Dems in Congress to change this proposal?

        1. Entitlements like Social Security and Medicare/Medicaid are insurance programs. If they are insufficiently funded, then the solution is to fund them.

          Social Security demographics indicate a shortfall in the future as the baby boom bulge moves into retirement. Increasing the income subject to SS withholding easily fixes this problem.

          Health Care demographics indicate that medical insurance for the elderly will need to be better funded in the medium term. Aside from the Republicans on this forum, I think we can all agree that the medical needs of our elderly should be taken care of.

    2. But, as ArapaGoop notes, it’s pretty much a shell game as to where the money is coming from.  And, it’s being sold as a reduction in the SS tax.  That’s a terrible idea.

      2. I have to say that as a small business owner a tax break like that would definitely have a positive impact on both my income and my spending. Not that your point isn’t equally valid because it is. But having a valid point doesn’t negate that giving a large payroll tax break will generate some income in smaller businesses that will either be rolled into back into purchases for the business or in my case, for a part time employee in the summer.  

      3. Social Security is funded by a payroll tax. It is an insurance program. You pay in during the course of your work life, and you are “entitled” to receive benefits in your old age.

        Just because you don’t understand how Social Security works, doesn’t make it a shell game.

  4. Sure, some folks will spend the 1500, but like most people are already doing, folks will be more inclined to use it to pay down debt or save it outright (see Bush, circa 2001).

    Neither paying down debt nor saving really injects money into the economy.  For it to work, people need to use the money to buy something that they wouldn’t already be purchasing.

    I’d suggest Visa/MC gift cards but the logistics would be a nightmare and I suspect fraud would be rampant.  Plus, it doesn’t solve the crux of the problem as folks could just live off the card until it was gone and save their paychecks or use it to pay down debt.

    Demand cannot be forced.

  5. Lump sum checks only produce a temporary stimulus. Once you’ve spent your bonus money you end up right where you started. Also, the government then has no control over HOW the money is spent. For example, if everyone spent their extra money on things that are quickly consumed and have no return on investment (like food, entertainment and travel) then there is very little multiplier effect.

    A better solution is investing taxpayer dollars in infrastructure. More efficient roadways and mass transit reduce the shipping costs of businesses. We can reduce energy costs by investing in renewable energy sources.

    The government has the unique ability to invest huge amounts of capital in projects that benefit everyone, but that no individual or group of investors would build.  

    1. And you are correct about the relative benefits in the long run.

      However, the reality is Obama is looking for something that will have an immediate impact, and one that has some chance of passing this dysfunctional Congress.

      So, once again, we are faced with the choice between a highly compromised, partially effective plan, or doing nothing.

      I’d love to see a new “Moonshot” program for renewable energy.  I think having cheap renewable energy at the granularity of a single home, or a neighborhood grid would be fantastic.  But that isn’t going to happen because it would take vision and massive R&D capital expenditures, both of which are in extremely short supply.

    2. We are in a demand-side recession, which means we should use demand-side remedies.

      Borrowing for infrastructure investment is a great demand-side stimulator of the economy because it borrows long-term at 0% real interest, to create current jobs, and fix infrastructure that makes our lives safer and makes things work more efficiently. People with jobs spend their money on houses, eating out, buying stuff, local taxes, etc, all of which cause businesses to hire more people to produce houses, dinners, stuff, school teachers.

      The multiplier effect is different for different kinds of people. Give a homeless guy a dollar and he spends it on a can of soup or a beer, directing 100% of your gift back into the local economy. The restauranteer or brewer makes more money. Give a middle class person $10,000, and she spends it on college, fixing up the basement. Give it a wealthy guy a million dollars and maybe he buys a new car, but usually he invests 99% of it in something safe. Not a factory, because a lot of factories are sitting empty and the economy doesn’t need new factories right now. Usually they invest in a portfolio of stocks, bonds, oil futures, etc.

      The multiplier effect shows that spenders impact the economy far more than investors.

      In terms of the economy, reducing Social Security payments directly impacts wage-earners, self-employed, and small businesses, precisely targeting demand side stimulus.

      Of course Republicans oppose demand side stimulus for two reasons:

      (1) They want the economy to fail so Obama looks bad.

      (2) Their base of support is the super-wealthy who want an even bigger slice of the pie.

      1. I think you oversimplify the GOP opposition to demand-side stimulus. Yes, they want both of those things you listed but there is a legitimate concern with the long-term effectiveness of certain demand-side stimuli. If a homeless guy is given $1 by the government to buy a can of soup, he eats and then is broke again. Give enough homeless people $1 and the soup company may make enough to hire new workers, but they won’t because they know that once their homeless customers eat their soup their sales will drop back to the pre-stimulus level.

        I’m all for putting more spending money in the pockets of consumers, but not by handing them a check from the government. I’d rather see the government help relieve consumer debt and bring down the costs that low and middle class families are experiencing. The President proposed a program helping families refinance their homes. I think a credit enhancement program allowing homeowners buried in mortgage interest to refinance at lower fixed rates would be a great idea.  

  6. I understand the problems with writing large checks to everyone.  As was noted, it may not be that stimulative because people may end up paying down debt or putting it into savings.

    But, I haven’t seen any challenge to the central problem of reducing Social Security taxes without a mechanism to insure that they will ever be raised again.  

    Is there concensus that it’s a bad idea to cut Social Security taxes?

    1. If my generation is never going to get social security of any kind, I’d quite like to stop paying that tax entirely and see the dollars out of my paycheck instead diverted to some sort of alternative social safety net program that is somehow designed to stay more solvent and be better protected against politically motivated pilfering. Or, we could just actually FUND the program we have.

    2. As was noted, it may not be that stimulative because people may end up paying down debt or putting it into savings.

      Social Security targets WAGE earners who spend a high percentage of their income. Small business, self-employed and wage earners are struggling just to make ends meet.

      Your assumption about saving is true if you are talking about giving a tax break to high-earners. See the Multiplier Effect.

    1. Removing the cap on SS taxable income, currently at $106,800, is not a good idea.  The SS tax is not even called a “tax”, it’s called a “contribution” because SS is considered a retirement/insurance program.  And, like retirement/insurance programs the amount you pay in is supposed to be somewhat equivalent to the cost of receiving those retirement/insurance benefits.

      It’s already not a great system for high income earners because the bulk of your SS benefits are earned on the first about $35,000 of wages.  Benefits are greatly discounted on wages above that amount.  If you remove the SS ceiling without increasing the SS benefits then it just becomes another tax and not a retirement/insurance program.  

      There is nothing fundamentally wrong with our SS system that some tinkering can’t solve.  But, creating SS tax holidays is the first step on a very slippery slope towards eliminating the program.

      1. See the Internal Revenue Code, Chapter 21.

        Chapter 21 is titled “Federal Insurance Contributions Act”, but the Subchapters are “Tax on Employees” and “Tax on Employers.”  It is collected and enforced as a tax by the IRS.

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