President Obama is expected to ask Congress this week to extend the payroll tax cut every working person who gets a paycheck has been receiving for the past year. Sounds like a good deal doesn’t it! Well here is the real deal: under a bipartisan deal Obama made with Congress in 2010 and starting 2011, the deduction on your paycheck for Social Security, often called a payroll tax, was cut by 2% for a year. The rate that worker’s paid was cut from 6.2% down to 4.2%. The employer contribution stayed the same at 6.2%. This payroll tax pumped $112 billion dollars into the economy but in reality it is or was money that was supposed to be going to Social Security. But it does not stop here.
President Obama has asked for a $175 billion dollar one year extension and expansion of the employee payroll tax holiday now in place. He wants to half the tax rate for Social Security to 3.1% from 6.2% in 2012. He is also proposing halving the employer portion of the Social Security payroll tax from 6.2% to 3.1% for the first $5 million of payrolls in 2012. The president also wants a “payroll tax holiday” that would apply when companies grew their payrolls by up to $50 million dollars in a year by hiring new workers or raising the salaries of existing workers. But Social Security advocates worry that these “temporary” tax cuts will never be restored. No one is exactly sure of the long term affect these tax cuts will have on Social Security but it is opening a door to uncharted territory.
FICA was carefully thought through by the people who designed Social Security and the payroll tax was insisted upon by Roosevelt who understood that it was important that Social Security not be welfare. There is no doubt that cutting the payroll tax may eventually weaken Social Security. However, since there really is no longer a Social Security Trust Fund, the money that is funding Social Security currently, is being reimbursed out of general revenue. It is all smoke and mirrors!
A lot of the controversy on Social Security hinges on the nature of the “Trust Funds.” For most of the past 30 years, Social Security has collected more in revenue from Social Security taxes on workers than it has paid out in benefits to retirees, widows, orphans, and the disabled. Contrary to popular belief, Social Security taxes are not deposited into the Social Security Trust Funds. These Social Security taxes become part of the government’s operating cash pool, or what is more commonly referred to as the U.S. Treasury. Once these taxes are collected, they become indistinguishable from other monies the government takes in. The Social Security revenue is accounted for separately through the issuance of federal securities to the Social Security Trust Funds. The infamous Trust Funds are nothing more than paper accounts. Current estimates are that the general fund has borrowed close to $2.6 trillion dollars in bonds.
So what we have in Washington right now is a shell game. Social Security future funding is part of the $15 trillion dollars the United States owes itself and foreign governments. So what President Obama and Congress are doing is reducing the Social Security taxes that they collect but these taxes are really not put in a Trust Fund but are comingled with all the other tax revenue that the government collects and moved around like the shells on a board to keep the game going. Actually, if Congress wanted to do it, they could abandon the Social Security withholding tax and fold it in with the regular federal withholding that is taken out of the taxpayer’s check. All it would take would be to scrap the Social Security dollar limitations that currently exist. Some analysts have predicted that this could happen in a few years, but then the shell game might not be as much fun.