A one third cut in employee FICA taxes could be trouble for Social Security

Is the Payroll tax holiday a trap?

A battle to resolve what to do after the “Bush tax cuts” were to expire led to an agreement between Republican leaders and President Obama introduced a stimulus tax cut involving Social Security payroll taxes.  For the first time in 27 years, the payroll tax was reduced from 6.2% to 4.2% for all workers. President Obama claimed that he wanted the reduction as an economic stimulus.  Of course, providing tax cuts to the lowest income workers will certainly provide a stimulus, but they will also divert $112 billion from the Trust fund. 

 Because of the temporary tax cut, for the first time in 27 years, the Social Security program will run a deficit.  The deficit will be the difference between payroll tax revenues, and the combination of benefit payments and the small expense of operating the program.  For the last 27 year Social Security has had yearly surpluses and the trust fund has accumulated $2.6 trillion dollars in surpluses.  Those surpluses have been borrowed by the federal government to cover deficits in the general fund.  Here’s the catch, the money is to be repaid to the trust fund from general revenues, but the government has had to borrow 12 trillion dollars over the last 30 years, so it will have to borrow in the commercial bond markets in order to reimburse the trust fund.

Now, with the Republicans in control of the House of Representatives, just how likely are they to default on the reimbursement.  If you have no idea, try “VERY LIKELY”.  For decades, the Republicans have insisted that there is no trust fund; they claim it is a fiction, so why would they intend to repay money to a fund that they claim does not exist?  The trust fund is the Achilles tendon of the Social Security program.  Cut it and the program is crippled and ripe for the kill.   If there was to be a payroll tax holiday, it should have been paid for from cuts in income tax withholding, not from FICA premiums. 

The payroll tax holiday is set to expire in December 2011, so won’t we see a repeat of the same arguments about taxation that we saw this year?  Won’t the Republicans insist on extending those cuts and further weakening the program?  Their dream, as expressed by Newt Gingrich back in the 1990s, is to see programs like that wither on the vine, starved to death from lack of funding.

The President needs sound advice regarding what is needed to preserve Social Security for future generations.  He will not get it from his deficit reduction committee.  They implied that Social Security is part of the deficit problem even though the program has provided surpluses, not deficits, to the consolidated budgets. 

See Professor David J. Ekerdt’s column in the Christmas day edition of the Kansas City Star at the following website:    http://voices.kansascity.com/entries/social-security-has-strong-future/

Concerns about the Deficit Commission report

There should be a wide ranging discussion about the report from the “National Commission on Fiscal Responsibility and Reform”.  They called their report the “Moment of Truth” and, in fact, it does present some disturbing facts that should concern us all. There are a few issues in just a few paragraphs of the report that should be sufficient to start an analysis.

The following paragraph is taken directly from the report:

“Our nation is on an unsustainable fiscal path.  Spending is rising and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference.  We face staggering deficits.  In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP), the value of all goods and services produced in the economy.  Only during World War II was federal spending a larger part of the economy.  Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950.  The gap between spending and revenue – the budget deficit – was just under nine percent of GDP”

In 1993, after his election, Bill Clinton asked Congress to raise taxes on high income families and individuals.  Clinton had inherited large deficits from George H.W. Bush who had inherited big deficits from Ronald Reagan.  During their time in office, first Reagan and then Bush, added three trillion dollars to the national debt.  When Carter left office the total national debt was $909 billion dollars, when George H.W. Bush left office the debt had more than quadrupled to four trillion dollars.  The Clinton tax increases were retroactive to January of 1993.  Under Clinton the deficit shrank during every year of his administration.  By the time that he left office, the deficits had disappeared and there had been three years of surpluses.  Clinton left a surplus budget that lasted into 2001, the first year of the Bush administration.  Immediately, after the first Bush tax cuts, deficits were back.   

From 1976 until 1984, Social Security ran small budget deficits totaling about 27 billion dollars, but after the new Social Security law was passed in 1983, tiny Social Security deficits were erased and since then surpluses in that program have helped to disguised the true size of the federal deficits in the general budget.  Since 1984, Social Security has accumulated around $2.6 trillion dollars in surpluses; those surpluses have served to finance the deficit spending in the general budget.  Clinton’s first surplus came from Social Security surpluses.  Most of the next two surpluses came from Social Security as well.  But Social Security revenue was not sufficient to conceal all of the deficits after the George W. Bush tax cuts of 2001 & 2003.     

Upon taking office in 2001, George W. Bush cut taxes.  The Democrats demanded the 10% bracket for low income Americans.  Those couples with the highest incomes received a tax cut from 39.6 to 38.6 on taxable earnings above $307,050.   In 2003, a new tax bill cut rates for high income recipients from 38.6% to 35% for couples with taxable earnings of $319,100 over.  Starting in 2002, revenues dropped from 19.5% of GDP to 17.6% while spending increased from 18.2% to 19.1% of GDP.  Deficits returned.   In 2003, Bush started an unnecessary war in Iraq that was not paid for. Federal revenues decreased to 16.1% and spending increased to 19.7%, widening the deficit.   The following is from the report:

“Since the last time our budget was balanced in 2001, the federal debt has increased dramatically, rising from 33 percent of GDP to 62 percent of GDP in 2010.  The escalation was driven  in large part by two wars and a slew of fiscally irresponsible policies, along with a deep economic downturn. We have arrived at the moment of truth, and neither political party is without blame”  

The fact is that the commission report only shows the publicly held debt.  It does not reflect internal debt, assets held by and owed to the 239 federal trust funds.  The biggest trust fund, of course, belongs to Social Security which holds $2.6 trillion of the gross national debt.  Looking at the gross national debt, the total debt, the numbers are a bit more disturbing.  Instead of 33% in 2001, the gross national debt was actually closer to 57% of GDP.  Instead of 62% in 2010, the gross national debt was 94%, much more than just the debt owed to the public.  Money owed to the trust funds will have to be repaid and will require tax increases or more public borrowing.  The obvious answer is to roll back the Bush tax cuts especially those for high income families.  Those tax cuts have been the cause of our burgeoning national debt.  The next paragraph sums up problems that this country will face if something is not done now.

“Over the long run, as the baby boomers retire and health care costs continue to grow, the situation will become far worse. By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security.”

You can review the report at the following link. 

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

Most of the data for this blog was taken from Internal Revenue tax rate schedules.

 

Gross national debt calculations were taken from the following website:

http://www.usgovernmentspending.com/federal_debt_chart.html