Social Security is a combination of two programs: a tax, AKA FICA or “the payroll tax”, that nobody likes and benefits, Social Security retirement benefits, of which practically no one approves (either because they’re too large, too small, or that they exist at all) which in combination form a program that a majority of Americans like. Right now Congress is agonizing over whether to extend the payroll tax cut it enacted purportedly as fiscal stimulus. I think it’s rather likely to do so, for a complex combination of political calculus, party politics, and ideological preference. I further think that, having once cut the payroll tax, Congress will find raising it again enormously difficult to restore it as slow or no economic growth winds into the indefinite future. The stump speeches practically write themselves. Don’t raise taxes during a recession! They want to kill Social Security! They want to tax the poor and give the proceeds to the rich! And so on.
I’ve already expressed my views here at some length. Social Security is a welfare program. It is necessarily paid by people who work as will any alternative system: however constructed people who have jobs will pay the freight. It’s where the money is. And some program of supplementary income for seniors will be necessary into the indefinite future for a substantial laundry list of reasons. We may as well continue to call the program “Social Security” because that’s what we’re used to.
Contrary to what you might suppose the cut in the payroll tax hasn’t depleted the Social Security Trust Fund: the Treasury dutifully transfers the money that FICA would have brought in into the system’s accounts. However, I think that cutting payroll taxes has depleted the meager intellectual underpinnings of Social Security as anything other than a welfare program and I find it remarkable that a Democratic president should be so enthusiastic about doing that. I suppose the thinking is that as long as workers are being taxed at any level they will be able to rationalize Social Security as “just getting back the money they put in”.
Bruce Krasting, who’s been on top of the Social Security story for some time, sounds a warning note on the program:
The 2011 numbers for SSA indicate that we are at least five years ahead of existing thinking on the SSA deficits. When this realization sinks in, it will break the hearts of the SS defenders. If we are, as I contend, five to six years ahead of “schedule†with cash deficits at SSA, there is no alternative besides cutting scheduled benefits. Raising taxes to fill a hole this big is not an option. Nor is it an option to maintain the status quo and allow for a very rapid rundown of the SS Trust Fund.
Whether you think that means that the U. S. government will need to go, hat in hand, to the Chinese for additional loans, the U. S. government needs to print more money, or it (or the Fed) needs to wave more money into existence, that will mean higher inflation and/or slower economic growth than we otherwise would have had, further decreasing the likelihood that the millions of people left jobless in the aftermath of the collapse of the housing bubble will find work.
The Congress’s inability and the “supercommittee’s” inability to find anything remotely resembling enough to bring our fiscal house into order should be proof enough that the difference won’t be made up by cutting other spending or raising taxes.
Update
Diane Lim Rogers (AKA EconomistMom) on the debate over extending the payroll tax cut:
In the debate over the payroll tax cut, we are hearing arguments from both sides that muddle the distinctions between short-term, demand-side stimulus and longer-term, supply-side growth. Many Republicans argue that the payroll tax cut is not an effective way to expand the economy, but they are probably measuring it against their favored supply-side yardstick. The Congressional Budget Office (CBO) shows that a payroll tax cut is one of the most effective tax cuts in stimulating demand for goods and services in a recessionary economy — not as effective as direct spending on unemployment benefits but still far more effective than high-end income tax rate reductions.
Both Democrats and Republicans seem torn about paying for the payroll tax cut, for probably different, yet both valid, reasons. Democrats don’t want to offset the cost with immediate spending cuts that could largely negate the short-term stimulative effect of the tax cut. If spending cuts are fairly immediate and significantly affect lower-income households, they would likely offset the stimulative effect of the tax cut. Republicans don’t want to offset the cost with other tax increases because they worry that supply-side incentives would worsen. These concerns are legitimate when the offsetting tax increases stretch into the longer term (after the economy gets back to full employment) and to the extent that the tax offsets adversely affect the returns to working or saving.
I supported cutting the employer’s share of the payroll tax when the economy contracted to reduce labor costs at the point in time when payrolls were being reduced. Now? Meh.
I read the CBO report as merely conveying the limitations of what could be done. Extending the Bush tax cuts would produce jobs, but would be limited in that too many people don’t pay income taxes. The payroll taxes have a broader base, but because they are seen as temporary, and therefore most of the cuts would be saved, not spent. You could expand the effectiveness of cutting payroll taxes by inducing the perception that they are permanent, and I do wonder if that’s the case here. Given increases in payroll decutions for healthcare (and increasing taxes in some states), how many people actually “felt” the payroll tax cut? If they didn’t “feel” the cut, I would submit that contributes greatly to the perception of permanence.
The Congressional Budget Office (CBO) shows that a payroll tax cut is one of the most effective tax cuts in stimulating demand for goods and services in a recessionary economy ….
I’ve been reassured that we are not, in fact, in a recession.