Should We Be Concerned About Deeper Cuts to the Payroll Tax?

One of Obama’s points in his speech Thursday was that he would be asking Congress to cut more on the payroll tax from what was cut already in the compromise agreement between him and the GOP last December.  These cuts could actually hurt more Americans than they are intended to help.

The Republicans are in full gear to diminish and alter one of the most successful entitlement programs this country has had – Social Security.  Medicare too has been tremendously successful but unlike Social Security it suffers cost issues from abuses by providers while also paying for many questionable services that patients feel encouraged to utilize.  The last thing our President needs to be doing is opening a path that will assist the Republican/Tea Party in achieving the means to kill off these vital programs.

Both programs, as does unemployment benefits, depend upon payroll contributions deducted from our earnings each paycheck to sustain them.  The formula for social security deductions has kept the program solvent almost its entire life.  Last year was the first time since 1983 when the program paid out more than it took in.  This is the result of less revenue from payroll taxes due to high unemployment rates, more baby boomers becoming of age and those laid off older workers who find it easier to claim early retirement at age 62 than hassle with the younger generation vying for jobs.

It has been argued that Social Security benefits are a drag on the deficit.  That’s a distortion and is only true in the sense that congress keeps “borrowing” from that trust fund to pay some of the other bills they have to.  When they borrow money for Social Security it is covered by the “full faith and credit” of the Untied Sates government and invested in special Treasury bonds.  But this borrowing from the $2.5 trillion that social security is valued at is now considered part of the U.S. debt.

The $49 billion shortfall we are now experiencing in social security revenue can be corrected by generating added revenue that will have the least impact, if any, on most all working Americans.  Those who protest tax increases of any sort are often people who are less likely to be affected by them.  For instance, if we simply boosted the amount of earnings subject to the payroll tax over time we could cover this shortage in plenty of time before the 2036 date that says if we do nothing, current benefits will reduce to a 75% payout amount.

Currently income over $106,800 is not taxed to help pay for social security as well as the other payroll taxes for Medicare and unemployment benefits.  This means that increasing this amount will have no affect on 95% of income earners in this country.  Also, income from investments – income that the wealthiest among us receive most of their income from – are not subject to the FICA taxes which social security is part of.  By making these sources of revenue subject to taxation, social security would become solvent for at least the next 75 years, long after the baby-boom generation no longer creates a strain on the trust fund benefits.

So if added revenue will correct what needs to be addressed with recent Social Security shortfalls, why is Obama talking about reducing the existing source of revenue that traditionally has fed the system?  Back in December when the President was trying to appease the Tea Party segment of the GOP to raise the debt ceiling he tossed them a bone in the form a of tax cut.  That tax cut amounted to about a 2% reduction of the 6.2% rate currently established as the amount that we pay on payroll taxes.  It was intended to put a little extra spending money in the pockets of American worker but it also “blew a hole in the financing mechanism for Social Security by reducing payroll tax revenue by roughly $110 billion for the year.”

Sorry Peter but I need to pay Paul

With the enactment of “The American Jobs Act”  the FICA tax holiday for workers will be increased to a 50% reduction, lowering it to 3.1%.   Along with this “the President proposes to extend the FICA tax holiday to employers by cutting in half the employer’s share of the payroll tax through the first $5 million in payroll.”

Under the payroll tax cut initiated in the 2010 lame duck tax deal, the revenue loss to the Trust Fund from the payroll tax holiday is made up through compensatory payments into the Trust Fund from general revenues. The President proposes to continue this scheme — deepening a relationship between Social Security and general revenues (read deficit) that did not exist until the December 2010 tax deal.  This will make Social Security increasingly vulnerable to demands for “reform.”

In the worst case, Congress could choose to enact the payroll tax cut without actually appropriating revenue compensation for the Trust Fund.  This would mean that the payroll tax cut directly depletes the Trust Fund, creating financial/actuarial problems far sooner than the currently anticipated shortfall date of 2036. – SOURCE 

He couldn’t be handing Grover Norquist and all the other anti-government people a sweeter gift than transforming the way Social Security pays for itself to one that would actually make it a drain on general tax revenue.  Thus it could be  more legitimately argued by the those who want to privatize the system that the nation is spending more than it takes in and Social Security is part of the problem.

I don’t want to accuse Obama of working with those people who drool over the prospect of getting all that tax revenue that pays into the trust fund so they can make a profit off of it while diminishing the benefits.   But if it isn’t clear to him that this tactic, intended to stimulate the economy, is really a slippery slope that allows free-market proponents to shrink the Social Security trust fund to a size “that can be drowned in a bath tub”, killing it off completely, then he either hasn’t got the foresight many of us have given him credit for or he is taking sides with those who want to reduce the deficit on the back of the least powerful and most vulnerable in this country.

I can appreciate the fact that by allowing more people to take more of their paycheck home will convert into more spending that can help jump-start the economy.  But let’s be realistic.  Nearly one-fourth of the nation’s wealth is controlled by only 1% of its people while slightly more than half of working American  households make less than $50,000 a year.  More than half of those, 28%, make less than $25,000.  For this latter group that means they get to keep about $65 a month more if the payroll tax is cut to 3.1% as suggested in Obama’s Jobs Act.  With the high cost of essentials like gas, food and rent, $65 dollars will likely not make much of an impact on growing the economy.

But this further reduction of the payroll tax will begin to eat away at entitlement programs that benefit many of the low-income earning families that assist them with health care costs that they would otherwise not have available to them.  There is also the concern too that lower payroll taxes that help provide unemployment benefits will be further strained to alleviate financial distress when people get laid off due to a failing economy.

Many young working people today may not empathize as much with this concern as someone who has worked all their life and is now ready to retire.  For those who were lucky enough to tuck away money into a retirement fund, the benefits they are owed from the social security trust fund may only be a small part of their income revenue to sustain them.  But they are in the minority.  According to the Center on Budget and Policy Priorities close to 90 percent of people 65 and older get at least some of their family income from Social Security. Social The venerable trust fund now provides most of the income for more than half of the elderly and for many, it is the only income they have.

For children of those elders reaching retirement age who are watching their own shrinking budgets, I can tell you from experience that had it not been for Social Security benefits my mother and father would not have remained as independent as they were nor received the medical care they needed.  Our family, like most Americans are not among that class of people who have sufficient wealth to cover their own needs and then some.  We struggle with our own families to get by and if we had to incur the rising expense required to take care of our aging parents it would put a further strain on already strapped resources.  This would feed the cycle of a worsening income disparity taking place in this country today because saving for your children’s college education and your own retirement would have to be put on hold to do what you need to do for those who raised you.

The further cut in payroll taxes may be appealing to many hard working families in these tough economic times but it can become a catch-22 problem that will only make our lives more miserable down the road as the safety nets that keep millions of Americans from falling into the despair of poverty and ill-health are eaten away by a move that lowers the resources needed to keep them intact.

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7 responses to “Should We Be Concerned About Deeper Cuts to the Payroll Tax?

  1. Well, if you take a hint from the Tea Party audience at the GOP debate, why don’t we just let anyone near retirement age die so that they don’t drag on our national treasury. I think they might like that.

    • I’m afraid these people have their heads wrapped around this notion of self-interests so much that compassion hasn’t any place for them, especially if it involves federal assistance

  2. Excellent post! I can not think of anything that needs to be added. All the plans from the past have bankrupted the country and this will continue until people remove their collective heads from their asses…..

  3. Pingback: What happens to the money you pay as payroll taxes for Social Securty « quinnscommentary·

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