Senate Stimulus Package: Tax Cuts, Social Security & SSI

A reader in comments asked why the Bears had not posted on Obama’s stimulus plan.

Well, speaking for myself, that was mostly because we didn’t have a plan and still don’t. What we have is the shifting outline of a plan subject to negotiation between the Admin and the Congress, leaving no solid starting point for analysis. But the two Houses have now produced fairly detailed individual plans that do provide such a starting point. In this post I want to examine the Senate’s proposed individual tax cuts. First outlining the plans and then posing a series of questions.

The tax cuts come in two forms. For workers we have a proposal for a $500 tax cut per worker, $1000 per couple for 2 years, to be delivered via a payroll tax holiday on the first $8100 for each worker. This represents the employee share of the tax (6.2% x $8100 = $496), so it would seem that the employer still pays his full share. Unemployed workers would get this in the form of a refundable tax cut delivered via the IRS. The total cost of this plan is $142 billion or $71 bn per year with probably 90% of that delivered via SSA and the remainder via IRS. But it also seems to assume a two-earner household.

Then the Senate added a one time $300 bonus for seniors, the disabled, and people receiving SSI. The AP article I am using doesn’t score this out but given that just under 50 million people were receiving Social Security retirement of disability in 2007 this should work out to $15 billion on the OASDI side plus some more for the SSI people.

Seems simple enough? Well not from where I am sitting, I see all kinds of red flags. Details below the fold.

Update: (rdan… Barkley Rosser notes Jamie Galbaith’s interview on entitlements at Econospeak and also see

Currently payroll taxes got to pay for Social Security and Medicare Part A with any cash surpluses credited to the Trust Funds where in turn they draw interest against the time when the Trust Funds need to start being tapped. Which under Intermediate Cost assumptions is 2017. In 2008 the cash surplus for Social Security was right around $80 billion. Given current unemployment numbers we can expect 2009 to come in below that, perhaps $20-30 billion less. If that is right this proposal would more than wipe out the first year surplus ($57 bn plus $15 bn) and likely wipe out the 2010 as well ($57 bn). Unless the Trust Funds are somehow made whole you have blown a big hole in Social Security, because not only will it have lost the cash surplus, it also will lose out on all accrued interest on that, which with compounding adds up to a pretty big total hit to a program whose ‘crisis’ is marked by a gap between projected revenue and projected costs after 2017.

This doesn’t bode well for the financial summit next month. Because it would seem that the initial response to ‘crisis’ is to choke off revenue which in turn brings Trust Fund shortfall closer and deeper. Which would seem to grease the slide for a benefit cut based ‘solution’. Was Social Security a ‘Phony Crisis’ as Dean Baker insisted in 1999? Well in certainly was and that was still mostly true in 2008. But it looks like someone is trying to make it real through the back door.

Now it is possible that the proposal does aim to make Social Security whole. But this raises some issues of its own. Social Security as currently configured has no way to hold cash, so a direct transfer from the Treasury is out of the question. The program could be changed in a way that allowed the Treasury to use cash to purchase outside assets and so credit those to the Trust Funds but this would require opening up Social Security itself to all kinds of malicious tinkering, and so probably should be avoided. Which leaves the standard option of Treasury simply crediting the TF with Special Treasuries in the amount of the diverted payroll tax. On paper this would make the TFs whole and avoid the loss of those years of interest. While less than ideal this would be for me an acceptable resolution to the problem created by the dollar diversion to stimulus. I just wish we were not going down this path at all.

Because we have gone from a situation where we had two big pools of revenue and cost that were legally separate. Under current law if Social Security ends up being overfunded going forward its choice would be between sweetening benefits or cutting taxes. If it turns out to be underfunded compared to the schedule it is legally on its own, under IC projections that means considering some package of tax increases/benefit cuts starting in around 2030. And from the perspective of workers that is a pretty reasonable bargain, Social Security not drawing on capital (except in the form of collecting interest on money lent to the General Fund) and so not owing anything to capital. Under this proposal that breaks down. Instead we have lower income workers having much to most of their federal tax burden eliminated for at least a two year period. Which is good for them in that sense, but ends up validating the Right talking point that poor people don’t pay taxes. In reality poor people pay all kinds of taxes directly and indirectly from sales taxes to property taxes funded via their rent payments. And until this proposal came along in the form of FICA payroll taxes to fund a combined insurance/pension plan. Now it looks like that dignity of largely paying for your own retirement is at least temporarily stripped away. I doubt many minimum wage workers would care, under current circumstances they are likely to need that $500 or $1000. And I for one wouldn’t expect them to resist the whole plan on principle. But generally speaking when I hear the words ‘payroll tax holiday’ I am tempted to reach for my pistol. Because history shows that more often than not proposals that use that mechanism have a not-so-hidden agenda of undermining traditional Social Security simply for the sake of doing so.

But this isn’t the only issue. Who counts as unemployed under this proposal? What happens with one earner households? What if one earner in a two-earner household makes less than $8100? If every adult not currently in the work force is included than most of the administrative difficulties go away. On the other hand you have also given out free cash to every rich college student and to every poor drug addict and for that matter every rich college student Amsterdam hash and coke addict. But if you start drawing eligibility lines you could end up with an administrative and/or enforcement nightmare. For example what do you do with the stay-at-home spouse? The proposal suggests that each couple should get $1000 so clearly the intent is to include them in. Which suggests two possible solutions. One you could exempt FICA on the first $16,200 of income for the earner. Which would mean that employers were tasked with tracking employment status for all employee spouses so they would know when to start and stop the exemption. Oops. HR and accounting are not going to like that, you have added substantial compliance costs. Or you could just handle this on a mixed basis, with the earner’s $500 coming from FICA exemptions and the non-earner’s from a refundable credit. Which shifts the compliance costs over to the IRS.

I understand the attraction of payroll tax holidays. They directly reward work. Which is good. And they seem simple and easy to administer. Well everything is simple if you ignore the complexities. I want to hear more detail about how this works operationally before I buy in. Color me skeptical.