The 2% (non) Solution: Part Two

Had a long day of Social Security related blogginess so will just put up this to spark some discussion:

In Part One of this post I discussed the danger that the 2% ‘temporary’ payroll tax cut might be a Trojan Horse destined never to expire in full or at all only to have any continuing backfill from the General Fund (by then surely to be described as a ‘subsidy’) subject to an ongoing series of ‘compromises’ that gradually phase in benefit cuts rather than take the whole thing at one gulp.

In Part Two I want to discuss a quite different threat. In this scenario the employee share of the payroll tax is allowed to reset to it 6.2% but as a seeming sweetener taxpayers will be allowed or perhaps required to divert it into a Personal Savings Account with the explanation that it really wasn’t a tax increase at all! Nope the money is still ‘yours’, just tucked away for your own future use rather than being co-mingled in the Trust Funds where you don’t have an ownership interest at all, why the Supreme Court said so in Flemming .v. Nestor. Well a visit to the link shows that this doesn’t mean what opponents often take it to mean, but the idea that the PRAs would be in any fundamental sense different is illusory, but before getting to that I want to point out a curious coincidence (or not). The 2% payroll tax holiday is the same amount of diversion proposed in most straight PRA proposals out there. Cynical people might suggest that this number was not just plucked out of the air, or back computed to approximate the typical effect of the expiring Make Work Pay tax credit which it is replacing, but instead to put in place elements of say Obama advisor Jeff Liebman’s Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan or even the more recent Galston-MacGuineas Plan which has a mandatory diversion of exactly this amount.

As I have said in other contexts, I don’t much believe in coincidences. This 2% cut is somewhat under-motivated in policy terms, there were other, simpler, and more targetted ways of putting dollars in workers’ pockets. But as part of a co-ordinated plan to sell some sort of PRA carve out as part of a larger Social Security ‘reform’ it makes all too much sense.