The 2% (non) Solution: Part One
by Bruce Webb (cross posted at new dedicated (and partially funded) blog Social Security Defender)
As part of the Tax Cut deal Obama cut with Republicans there was included a one-year cut of 2% of payroll out of the 6.2% employee share of the overall 12.4% of payroll sent to Social Security. This cut was ostensibly designed in a way that held harmless the Trust Funds, the dollars not being sent from paychecks instead being replaced by transfers from the General Fund. Plus the diversion is on paper only temporary. But in reality this deal not only should have raised red flags, it also should have blown reveille and set off the disaster warning klaxons. This deal represents a terrible danger to Social Security in at least two ways and is terrible policy besides. More below the fold.
If the so-called Payroll Tax Holiday stood on its own, you could argue that it is mildly progressive in that for one year it reduced the taxes of everyone on their first $106,800 of income while paying for it out of taxes that are mostly incident on the top 50%. Unfortunately it effectively replaced the expiring Making Work Pay tax credit which directed all of its benefits to families making at most $70,000. The net result may be a tax hike for as many as one in three workers. The whole grim business is described in this Huff Post piece: Obama-Republican Deal Could Mean Tax Hike For One In Three Workers by the appropriately named Ryan Grim. From my point of view the fact that the tradeoff was suggested by Republicans is all you need to know, millionaires will get a tax cut ten times of that of a single person working at FPL in a minimum wage job.
However this particular issue, however important from an economic justice and income inequality standpoint is somewhat peripheral to Social Security itself. And there are plenty of people more qualified than me to comment on it, starting with Mr. Grim, so over to them on this one. Instead I want to discuss two threats posed to Social Security, one that just brings the funding shortfall much closer in time and is pretty well recognized, and a second that is more subtle but presents an existential threat to Social Security itself.
The first threat is fairly simply stated: in today’s Washington D.C. there is no such thing as a ‘temporary’ tax cut. As long as Republicans have anything to say about it (and since they are effectively calling the shots even before they take control of even the House) there is no such thing as restoration of existing levels of taxation after a ‘tax holiday’, instead any such cuts will be presented as a tax increase, in this case a massive one. Because they can and will play games with percentages. That is while the cut is presented as ‘only’ 2% and so to reasonable minds would seem a small part of the revenue flow, it represents 16% of the total revenue flow generated by FICA payroll tax and a whopping 32% of that taken out of workers’ paychecks. Moreover taking the employee share simply back to 2010 levels means an increase from 4.2% to 6.2% or a whopping 47% TAX INCREASE. That is you can expect Obama to get headline credit for a 2% cut but get blamed for a near 50% increase even though it is the same dollars in question.
The anticipated rhetorical spin is only the start of the danger. Social Security Title 2 (what we know as Soc Sec today) has always been a closed system, to paraphrase Lincoln ‘of the worker, by the worker, and for the worker’, having taken nothing directly from capital it owed nothing to capital. Moreover because of the way that its dedicated taxation and later benefit levels were set up it was largely insulated from the Budget and Appropriations process. While opponents of Social Security could and did play games with the 1% of cost related to Administration, an amount that is exposed to those processes, that game playing didn’t put the whole system at risk (though it caused a lot of misery on the Disability Insurance side, where Admin has always been scandalously underfunded). But in 2011 a very substantial chunk of Social Security income will come from the General Fund. And while it is always possible that the next Congress will just ease that General Fund burden by letting the ‘holiday’ lapse on schedule there is no guarantee that they wouldn’t simply leave the 4.2% rate in place while cutting the subsidy from the General Fund and so blowing around a $120 billion hole in the income stream for 2012 and every year after. With the net effect of bringing the projected date of Trust Fund depletion back dramatically from its current 2037 date, perhaps as early as 2020.
Of course this might appear just too raw and hypocritical for the Republicans, that after crying ‘crisis’ they did what they could to precipitate it, but it opens the door for other chicanery. For example the Republicans could offer to leave the 4.2% rate in place, lower the replacement subsidy by 50% and ‘compromise’ by cutting future benefits in a way that offsets the other 50%. And then just repeat this exercise every year in their typical framing of separating “spending we CAN’T afford” (which always seems to be social spending) from “spending we can’t NOT afford” (which seems to be everything military and any efforts to raise revenues).
Social Security has been protected throughout its history by the wall represented by a dedicated payroll tax and a Trust Fund whose reserves were drawn from that same stream. This Administration just breached that wall, apparently in the futile attempt to show ‘seriousness’ and ‘bipartisanship’ which in this case translates to ‘willingness to screw your own base’.
This payroll tax holiday was a terrible policy choice to start with, continuation of Making Work Pay or direct transfers from the General Fund to workers would have been more effective and better targeted stimulus than a tax cut that also flows to millionaires. But the danger is not restricted to the direct breach in the wall. Instead there is a lurking Trojan Horse. Subject of Part Two.
i figured this piece of the negotiated pie would anger the AB folk, but as someone who’s not left-of-center this short-term “boost” is not only a waste of time and gimmickery, but scary. relative to the numbers alone i have to (cough, choke, cough), agree with bruce. it appears we had 2 boobs negotiating in the room: the proposers and accepters. who was the biggest?
Nailed it, Bruce. But we should be comforted, say the Villagers and other Very Serious People, that since SS is only a “transfer program” it doesn’t matter how the program is paid for, so long as the checks go out. Well, this may be the biggest achievement of the post-Depression Republican party. They have finally done for the most popular government program ever devised. And, to give them credit, the did it without a murmur of dissent from a sitting Democratic President. I have to give it to them. The Serpent in the Garden of Eden was no more subtle than these members of Congress. So, now the Catfood Commission’s other recommendations await. All in the name of deficit reduction and, mind, our own good. NancyO
Yeah, jeff. Shows why nobody likes politicians. I never could figure out why people beat up on federal employees when all they do is what Congress wants them to do. But, Presidents don’t have to take orders from the Pols on the Hill. Why he did this I’ll never know. NO
Mr. Thoma joins us in commenting on the FICA cut. NancyO
Unfortunately, too many of the sanctimonious left are not only sanctimonious, but dumb. Like Mitch’s bitch, they accept the notion that there is no harm in accepting what few crumbs the right offers when they capitulate. Keynes said in the long run we are all dead, but within my lifetime, I have seen the right’s longterm strategy to return this country to the gilded age succeed. Of course, when there is no opposition party, that is pretty easy.
Terry– the problem with the “left” (or D’s) is that they take money from the same contributors who fund the “right” (or R’s.)The D’s aren’t willing to oppose the people who pay their salaries–it’s…ummm…well….. so gauche–so proletarian. The R’s, on the other hand are doing exactly what the bosses want–no inner conflict there. As between people who don’t know the facts and don’t care, and people who think they have to tell the truth all the time, guess who always wins? NancyO
Bruce-Is your 2020 number using IC assumptions?
I understand your point–the capitalists have won the old fashoined way–they bought their victory, but who feels compelled to tell the truth? Certainly no politician or media source that I know with the possible exception of Bernie Sanders.
It is a half remembered result of a calculation by a name economist. Since I can’t find the cite to verify the date I am not going to name him but on most things Social Security he tends to use CBO numbers.
The argument would not change much if you swapped in 2030.
And personally I am more worried about the possibility to be addressed in Part 2, that the Repubicans will agree to restore the 2% (which after all doesn’t really touch their patrons bottom lines, what is $2200 to a billionaire) in exchange of mandatory PRAs. Which if past such plans hold to form will come with a combination of clawback requirements and withdrawal restrictions to leave most low to middle income workers no better than if nothing was done.
“it’s just a transfer program” another way of saying “it’s just welfare”
the tragedy of social security is that Peterson has been talking about it as if it were welfare… ignoring the fact that the workers are paying directly for their own retirement/insurance… and in the end the liberal defenders of Social Security were talking about it as if it were welfare.
FDR designed it not to be welfare… not the dole… but how can a dead man stop the stupid from destroying the best deal workers ever had.
I have totally opposed the tax cut and the 2% cut. But as I was scanning around the econoblogs, guess what I found. Sometime in early December Robert Reich had proposed this exact same thing, a 2% cut in payroll fully refunded. In fact I think the idea has been around for awhile, and not always fully rejected by liberals. Strangely, when the tax deal finally passed, Reich was one of the first econobloggers to denounce it fully, it took Krugman and DeLong a day or two longer. But even as he denounced it, Reich made no mention of the 2% payroll cut as being a potential destabilizer for Social Security.
Krugman has been one of the best in defending the Social Security program as social insurance, and following the same concepts, he has also denounced the very-popular-among-liberals (including many of my friends) idea of raising the payroll cap (with no corresponding benefits increase, though that is usually left unstated). Obama has made great hay on that from the beginning of his campaign. Now I’ve never seen anyone say this, but because of the progressive benefit structure, you could raise the cap and the highest benefit and still make it stronger. Well, maybe, I haven’t factored in the increased lifespans of wealthier people.
Sorry, this was Democrat initiative by a Dem President done with the full knowledge of an overwelmingly Democrat controll House and Senate. The Rs have clean hands here.
What I find fascinating is less than 6 years ago Bush Jr got slapped down hard by Democrats for doing far less towards privatizing SS than what’s about to happen. And Bush never even got past square one and abandoned the entire project with nary a wimper.
Now Democrats are leading the charge to gut FDRs legacy. Could anyone even imagine this 2 years ago? Could anyone imagine a McCain presidnecy even bothering considering how hard Bush got roughed up?
Just amazing that the Democrats will kill SS….
Islam will change
The political calculations are in full force….Howard Dean on Maddow made the tax and SS connection seamless in his talk.
auerback and ray are also on a mission with MMT and social security at new deal 2.0 and NC.
and if you had been around you would have heard me yelling about it for a long time. I yelled at Reich. He did not reply. I have been trying to tell people for years that Democrats and “liberals” were not to be trusted on Social Security. Either they were ignorant, or they were part of the con.
Raising the cap would not have made Social Security “stronger,” it would just have made it more enemies. Social Security could always pay for itself by the simple idea of letting the people who will get the benefits pay for what they will cost. About an extra forty cents per week every year due to the fact that those same people are living longer than the last generation. This extra would have plateaued in about 2050 with a slightly larger share of a much larger income going to their retirement fund/ insurance. Not an increased burden, just part of an increased standard of living.
thanks for the details. like i said above. the dems were always part of the con.
if they are not in on the con, they are like children playing with something they don’t understand. oooh, lookie here. here is a regressive tax that can be cut and stimulate the economy and provide the poor with a few bucks in their pocket to take to walmart. it’s win win win.
of course the bucks came from their retirement fund, but we can always make that up with a new welfare bill. the poor like being on welfare. and when the deficit gets really serious we can always cut the program.
When Peterson’s heirs cash their trust fund it is also welfare.
Someone paying interest and principal on a debt instrument [held by the SSA] is welfare in Peterson’s definition.
But not to China, Japan or his heirs and assigns.
Don’t worry. If the individual mandate is unconstitutional then certainly PRA’s are unconstitutional as well.
You are looking for a level of intellectual consistency that is not there. The individual mandate was originally a Republican idea designed to preserve a place for private insurance as against Democrats’ tendency to push for a Medicare for All solution (for example the 2007 Kennedy Dingell Plan http://www.pnhp.org/news/2007/april/kennedydingell_medi.php)
The mandate was the obvious point of vulnerability for what Repubs like to call Obamacare, lefties like those at FireDogLake hating it because it delivered them to the non-existent mercies of the insurance companies, and righties hating it basically because they were told to do so in order to take down Obamacare. I mean Rush can get away with bashing things like mandatory care of pre-existing conditions (even though I suspect his own policies covered his Pilodinal Cyst that was serious enough to keep him out of Vietnam).
Whether or not the mandate is upheld they will find some way of defending PRAs, probably by arguing that there is a much broader range of choice than people are likely to get under the insurance Exchanges. But trust me they’ll find something.
Reich has always been too clever by half and always more neo-liberal than progressive (I don’t recall him resigning in protest from the Clinton cabinet).
New Deal Liberalism has very little relation to the New Democrat/DLC/Third Way Liberalism that arose as a direct reaction to and against that branch of Liberalism represented by the Kennedy’s just as the ADA style Liberalism of the fifties and sixties was an explicit reaction to the Progressive Liberalism cum Socialism of former VP Henry Wallace.
Liberalism has always been a broad enough concept that you should always be wary of any claim that starts “Even Liberal X says”. Reich certainly doesn’t speak for me.
I don’t know why you libs are so in love with “targeted” tax cuts. When in history has that ever worked? Across the board tax cuts worked for Kennedy, Reagan, and Bush. It reminds me of a story on http://www.freemarketsfreepeople.net. “Bush Tax Cuts Caused the Recession?”. The shame is that Obama will get the credit for the Republicans reviving the economy.
Except there is no proof they worked for Reagan or Bush. Not when examined from the standpoint of anyone outside the top 5%. Where do those improvements show up in actual investment, productivity, employment or real wage?
On the other the vast explosion in unfunded military spending under Reagan and unpaid for wars under Bush under standard Keynesianism would seem to fully explain what limited economic advances you find under either, throw a trillion in defense spending at the economy and certainly you will give at least some boost to employment and the velocity of money.
Plus the whole idea that Kennedy’s cuts from 90 to 70 and then Reagans cuts to 50 and then 38 and then Bush IIs cut from Clintons 39 to 35 should all have economic effects that work in the same direction not only ignores the pattern of recessions and unemployment spikes after those latter two tax cuts, it also embeds the faith based idea that no matter what we are always on the wrong side of the Laffer Curve.
The numbers don’t show the same broader economic effects from the shift from 70 to 50 as they did from 90 to 70. And I know of zero measure that ANYONE except the top 1% even did better under Bush II than they did under Reagan. Looks to me like the sweet spot on the Laffer Curve is somewhere between 39 and 50, though I must say your ordinary kind of wealthy folk (i.e. not the multi-multi millionaires) seemed to do okay at 70. Were corporate execs begging in the streets of Westchester and Grosse Pointe back then?
All during the 80s and 90s people like Dick Armey waved away any reverses in economic performance in the wake of tax cuts by explaining that the effects of tax policy always take 18 months to phase in. Care to examine productivity numbers 18 months after the Bush 2003 tax cuts? Oops, I guess Dick needs to walk back that particular metric.
The historical evidence is pretty clear: cutting taxes on the rich makes them richer even as it facilitates conspicuous consumption. Not only are the excesses of the Reagan and Bush years legendary they made movies out of them. And now sequels. Ever heard of a movie called Wall Street? Check theaters near you.