Payroll Tax Cuts and Social Security

With the unemployment rate stuck above 9%, Pres. Obama and everyone else in Washington are coming up with anything they can to boost job creation. One idea proposed in Obama’s jobs speech a week ago? Hack payroll taxes (e.g. the ones that fund Social Security) in half. This time the cuts would cover both the employee and employer portion of the take.

On one level I think this is a great idea. It would mean a lot of extra cash to me personally because, as a self-employed person, I pay both the employer and employee part of FICA taxes on my eligible income (the whole 15.3%, rather than the 7.65% most people think they are paying even though they’re really paying the whole deal since it’s all part of the cost to employ a person). I like the idea of getting a tax cut multiple times.

But as pointed out in this Reuters article, one cannot simply hack the source of revenue for a major program without eventually having to deal with the program itself. Allegedly, the cuts will be temporary. But while it will be one thing to cut taxes, raising them again, from the hacked in half new level, will basically mean doubling them. If the economy were growing like gang busters, people might tolerate that, but the truth of the matter is that temporary tax cuts aren’t necessarily known for completely changing the game. As a business owner, you don’t think “oh, taxes will rise a lot in 2013, but it will never be 2013!” and then go out and hire 30 people you wouldn’t have otherwise hired. We’re kind of splitting the baby here. The tax cuts may be permanent, but we’re not getting the benefit of telling people they’re permanent.

So what is going on? I would personally like to find out that this is a back-door way of starting a discussion on massively scaling down Social Security. Regardless of what Roosevelt told people, it is just a tax like any other, and the checks the SSA cuts are just income transfers like any other. I’ve written quite a bit about trying to wind it down — once in a debate with Robert Reich in USA Today in which I advocated forcing young people to pay into it for another 10-15 years without seeing a penny. I mean, if most of us don’t think it will be there anyway, why not? Ending a Ponzi scheme (oh, Rick Perry! did you say that?) always requires that someone pay in while getting nothing in return. That’s the only way to atone for having given some original folks something for nothing, as Roosevelt did with his first set of retirees. Starving the program of funds and making it nearly impossible to raise them again (given that it will mean doubling the tax rate on people earning even small amounts) is one approach.

But it’s a pretty sneaky approach, based on the cynical idea that voters are not adult enough to handle the idea that you cannot have both low taxes and a government cutting checks to everyone over age 65 (or 62 in many cases). I understand that many government officials do believe this, and have good reason to. I’ve been reading former Mich. Gov. Jennifer Granholm’s A Governor’s Story, and she points to her polling data and focus groups which found that Michigan voters hated the idea of raising taxes, but also hated the idea of any particular budget cut. Didn’t matter whether it was to education, parks, health care, police, anything else. Apparently voters thought she could balance the budget when revenue was plummeting (due to disappearing manufacturing jobs) solely by cutting waste, fraud and abuse. I hear unicorns are fun to ride too.

The temptation is to be opaque when you are facing transparently silly beliefs. In the long run, however, we’re probably better off tackling these issues head on as we discuss what people want the government to do and not do and how on earth we plan to pay for it all. Social Security will not long survive in its current form with half its current revenue. I’m OK with that, but we should probably figure out who else is.


9 thoughts on “Payroll Tax Cuts and Social Security

  1. I think it would be a huge mistake to get rid of Social Security or have people invest the money in private accounts. What happens when a nation’s retirement fund largely disappears during a market crash? I get that as people get closer to retirement, they start to move their investments to less risky options, and younger workers have decades to recover. But there’s that chunk of time during middle age, where investors stand to lose a lot, and don’t always have time to recover.

    I do think Social Security definitely needs changes…the retirement age should have been raised to 70 a while ago. I also think we need a huge change in perception…it’s my understanding that social security was never supposed to be a person’s sole retirement plan. But I know people who really do think that the amount they’ve paid in should be enough to sustain them for 30 years (and they also wonder why, when people die just a few years after retirement, the surviving family members don’t get a big refund of the deceased person’s payments into the system).

  2. @Cara- Yes, there are definitely some misperceptions about it, like the idea that the money is “yours.” If you can’t give it to someone else (someone else inheriting the capital, for instance) it really isn’t. And it wasn’t set up to sustain 30 years of not working. The idea that you have to take it right as you retire is also funny — people complaining that raising the age means they’d have to work longer. No, not if you save for your own retirement, which is what anyone who wants to spend a long period of time not working should do. There’s just a certain strangeness of the mentality the program breeds. There are plenty of conservative-leaning seniors who complain about “welfare queens” but cash their own Social Security checks. Really, the taxes are just taxes, and the income transfers are income transfers like any other. I don’t particularly favor investing the money in private accounts that are somehow part of a social security program either. That doesn’t seem like a way to solve the problem.

    1. I live in a sparsely populated red state with no state income tax. We are one of the “recipient states” that receives more federal money than we pay in (we also get a lot from tourism and the energy industry). We are a state of welfare queens. And the people here don’t understand that. The big cultural myth here is that we are so self-sufficient. So they’ll complain about the potato chips and sodas they think “welfare queens” are buying with their “food stamps”, then turn around and gripe about how the people on the coasts (you know, the people in the donor states whose taxes support us) don’t have any business weighing in on issues like the use of federal lands in the state.

      How do you get people like that to a point where they can even reasonably participate in a debate about economic issues in this country?

      Ugh. Stressful. I really hope you have a nice happy post coming up about some awesome mom whose time management skills are so phenomenal that she can be a doctor, a lawyer, and find time to read every night to each of her dozen kids. Something upbeat???

      1. The question about federal support is complicated. In the county next to us, well over half the land is owned by the federal government (Bureau of Land Management and National Forest), which doesn’t pay any property taxes on it. Until the last couple years, the county (and by extension, the schools) received federal money (grant?) to cover the costs of roads and the extra buses required in a large county with little tax revenue. This has been cut and school days have been cut in response. Bussing is expensive.

        I’m not sure how accountants consider this, but if the federal government owns land that would be taxed if anyone else owned it, should federal payments be considered “support”? If timber companies owned the land, far more would be paid in property taxes.

        1. I’ve wondered about things like that too, because not every place indicates what they consider “support”. And in some calculations, that “support” includes social security payments and student loans. And from what I can see, the money a state supposedly sends includes more than just taxes that individuals pay on wages, investments, etc. I believe one site even talked about adjusting certain calculations for tobacco states to reflect the locations where cigarettes where actually purchased.

          For my state, the amount of money per capita we supposedly send to D.C. ends up being nearly a third of our state’s annual per capita wages (and we get even more back). Since our per capita annual wages are almost in the bottom third for the nation, it’s pretty clear that a lot of the money we send isn’t actually coming from taxes we pay as individuals (we certainly don’t pay 1/3 of our salaries in various federal taxes). We aren’t a state full of retirees, just a state with very few high-paying jobs. We do have tourism, and a lot of valuable natural resources that bring in a lot of money.

  3. Also there are pretty concrete stats on how most Americans have not saved enough for retirement… so what might happen if you pull SS is more of those folks would get welfare or some other gov program? I completely agree as a business owner that taxes are one of the most painful things for a business owner to face and would love your take on Obama’s tax cuts for hiring etc for small business. There are a lot of fees and regulations to hire that make it more attractive for a small business to have part time help or contract vendors rather than employees and this is bad for unemployment and the country. I also agree that retirement = not working for 30 years, should not be something a happy person plans for b/c not working for 30 years isn’t really shown to make folks happy. But you have to be reasonable, people get old sick or want to cut back… What would be good would be to see on average paying in 7% or 15% etc how much has one paid in over time and is this the same as what you get back.. if not I agree better to just let fo lks havetheir money.. for example youcould buy a rental property with what the gov is taking from you for ss and then collect the residual income on that…

  4. Hey I just wanted to post this food for thought b/c I think a lot of Americans do not get this and this is why we don’t see a more flexible labor market.. For a small or mid size business to hire someone…. they have to PAY the gov payroll taxes… Even with Obama’s cuts this is a little crazy… So as a business owner you take someone one, pay them insurance, etc and for that great service to the economy you have to pay MORE tax… What they should do is waive the corporate tax on the business for hiring x workers..that is instead of charging the business tax, let them use that money to hire… To aid small business, Obama’s bill cuts the payroll tax in half, to 3.1 percent, for employers on the first $5 million in wages, temporarily eliminates employer payroll taxes on wages for new workers or raises for existing workers, accelerates government payments to small contractors, and reduces regulatory burdens on small business capital formation. Included in the House Republican Plan for America’s Job Creators are congressional review and approval of any government regulations that “burden small businesses” and audits of existing and pending regulations to address those that “hinder economic growth.”

  5. Laura, I suspect you’re in a pretty small minority. One survey found that the overwhelming majority of the public rejects this view:

    Also, as far as trade-offs go, there’s a history of Republicans following electoral breakthroughs with attempts at entitlement reform. Here’s how Ron Brownstein summarized it:

    This history of futility begins in 1981, when President Reagan, after his 1980 landslide, sought to reduce cost-of-living adjustments and early-retirement benefits under Social Security. Both parties barraged the White House, and he quickly retreated. No matter: In 1982, a surge in elderly support helped power the Democrats to big midterm election gains that restored their working majority in the House. In 1985, after Reagan’s commanding reelection, Senate Republicans passed a budget that again limited Social Security increases—but it died when both parties rejected it in the House. Democrats recaptured the Senate the next year.

    In 1995, House Speaker Newt Gingrich’s Republican revolutionaries followed the 1994 GOP landslide with proposals to sharply limit Medicare spending. President Clinton won the ensuing showdown—mostly by arguing that Republicans were bleeding Medicare to fund tax breaks for the wealthy—and then cruised to reelection in 1996.

    It was once more unto the breach in 2005 when President Bush followed his narrow reelection by proposing to carve out private investment accounts from Social Security while reducing guaranteed benefits. That plan collapsed without a vote in either chamber—and accelerated the downward spiral in Bush’s approval ratings that helped fuel the Democrats’ big electoral gains in 2006 and 2008.

    Also noteworthy is that proposals that begin with “Cut Social Security” in the payroll tax suggestion garner less support.

    A more likely reality is they might replace the payroll tax with a carbon tax or VAT.

    But Jeb Hensarling, who shares your view, says he plans to play no such game as making the tax cut permanently to wind down Social Security.

    The reason why the payroll tax cut is big is it’s politically acceptable to both Democrats and Republicans. Republicans will turn elsewhere, like corporate tax cuts, in 2013. But, they’ve already said no to the extension, so I suspect they’re not interested in starving Social Security of revenue over the long haul via turning a holiday into a permanent cut. The notion of we’re getting a permanent tax cut may be a little far-fetched to begin with for one basic reason: if the proposal passes, it will likely be a temporary extension, and Congress will have to extend it permanently or year after year. Many conservatives and liberals in Congress oppose the payroll tax holiday, but it could be guided along by party leaders. After divided government, it’s much less likely to get that kind of attention.

    I also don’t know that people will be persuaded by the view that it would be unacceptable because of the weak economy. Hensarling talked about how not all tax relief is created equal, and insider accounts suggest they’re not persuaded the payroll tax did a lot of good and that getting rid of it would do a lot of harm. Republicans might be pressed becuase of the need to look they’re doing something in good faith this year, but they’ve showen little interest in that route.

    The payroll tax cut is based on current political and economic considerations, not sneaking in some budget stuff.

Leave a Reply

Your email address will not be published. Required fields are marked *