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Posted at 11:23 AM ET, 12/ 9/2010

The payroll tax cut, Social Security and the problem of the trust fund

By Ezra Klein

The tax deal cuts employee-side payroll taxes by two percentage points in 2011. This won't harm Social Security, or at least it shouldn't harm Social Security, because the money will just be replaced by general fund revenues (confused yet?). All in all, that should mean Social Security emerges unscathed.

But some liberals are understandably concerned that the payroll cut will be extended indefinitely. Then Social Security loses part of its long-term funding. And then what? More benefit cuts? Privatization?

I say, bring it on. Cutting payroll taxes and replacing them with general fund revenues is appealing in two ways. First, payroll taxes are much more regressive than income taxes. Second, I'm actually fine with breaking the sanctity of Social Security's closed funding loop. A lot of liberals disagree with me on this point, but hear me out.

Historically, Social Security has paid for itself through payroll taxes. But because Americans began having fewer kids during the 20th century, it's no longer paying for itself through payroll taxes. So now many in Washington want to cut the program's benefits to bring its spending in line with its trust fund.

But there are lots of programs and priorities that don't pay for themselves. The Defense Department, for instance. The United States Congress. The mortgage-interest tax deduction. There's no reason we can't preserve Social Security's benefits by spending somewhat more of our general fund revenues on Social Security and somewhat less of them on Medicare or tax cuts for the wealthy or incentives to buy big homes.

There's an argument in liberal circles that Social Security's funding structure, rather than its benefits, are what keeps it safe, as people feel they paid into the program and so protect it from attempts to cuts its benefits later on. I just don't buy it: Medicaid, the Earned Income Tax Credit, the military, farm subsidies and plenty of other policies that aren't pay-as-you-go have survived and prospered because they were popular with the American people, not because they had a particularly appealing funding structure. Moreover, its funding structure is currently forcing cuts that I think to be a bad idea, and that are decidedly unpopular. So whatever protection it once offered, it's now pushing in the opposite direction.

By Ezra Klein  | December 9, 2010; 11:23 AM ET
Categories:  Social Security  
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Comments

Hear! Hear!

Posted by: davidpancost | December 9, 2010 12:27 PM | Report abuse

The problem with the change in funding is that it potentially turns SS, in very conservative views, into a welfare program. As such, Repubs will feel even more comfortable making serious changes and cuts to the program's benefits and eventually phasing it out.

Posted by: valkayec | December 9, 2010 12:36 PM | Report abuse

I like your ideas, but I worry that disconecting Social Security from its payroll tax funding will make it less popular with parts of the public. The reason payroll taxes are regressive is because the benefits are progressive. If this link is not maintained I that the the argument for means testing the program would become stronger.

Posted by: ideallydc | December 9, 2010 12:39 PM | Report abuse

Please go read FDR. Thanks.

You really must hate SS or can't think two steps ahead.

Posted by: justmy2 | December 9, 2010 12:44 PM | Report abuse

Uncap FICA!!!

Posted by: AZProgressive | December 9, 2010 12:47 PM | Report abuse

Medicaid, defense, farm subsidies, etc. aren't continually renewed because they are 'popular', they get money because they have powerful special interest groups behind them.

Social Security really doesn't have any support that matters (as long as you don't threaten AARP members with near-term cuts), just universal support of the American people, which along with $5 can get you a cup of coffee at Starbucks.

Social Security exists because it doesn't compete with Real Programs (e.g., Bridges to Nowhere, Superartillery systems, Star Wars) for funding; the only real 'threat' is people wanting a cut of the revenue stream (a la Bush 'privatization'). If SS has to compete for general funds, it's dead in a year.

Posted by: eggnogfool | December 9, 2010 12:48 PM | Report abuse

Yep. Slay the beast.

It's time for social security to die so I can invest my 12.4% share in real retirement security in the private sector.

Posted by: krazen1211 | December 9, 2010 12:49 PM | Report abuse

Yep. Slay the beast.

It's time for social security to die so I can invest my 12.4% share in real retirement security in the private sector.

Posted by: krazen1211 | December 9, 2010 12:49 PM | Report abuse

Is it true the SS part of tax deal will mean that employers won't have to pay the SS matching contributions? If so, this means they save another 2% for each employee.

Posted by: lauren2010 | December 9, 2010 12:58 PM | Report abuse

How can you stand there and not see that Republicans are going to use this to reduce Social Security? How blind do you have to be? How can you not see this coming? Willful ignorance.

Posted by: kindness1 | December 9, 2010 12:58 PM | Report abuse

What Ezra said.

And just to add: what ULTIMATELY keeps Social Security safe is the political infeasability of letting old people starve, or requiring more in the way of support from their children.

Posted by: Jasper999 | December 9, 2010 1:04 PM | Report abuse

The funding mechanism hasn't protected SS from change, it's protected it from politicians from *trying* to change it more often than they have. It's self-funded, so it's not a pot of money in the normal sense competing with pet projects, etc. Still, what really protects SS is that it's very popular with the populace. A few politicians may try to divert funding from it more often than they do now, but the reaction will be no less extreme than when Republicans thought about privatizing the program for ten seconds: Swift, brutal, rebuke.

Posted by: MosBen | December 9, 2010 1:21 PM | Report abuse

I agree with Ezra 100% on this.

Often on these forums, I'll bring up the idea of means testing Social Security, which is simply to suggest that some people in America are wealthy and dont need the government to send them hundreds of dollars per month for the rest of their lives that could be used for a myriad of better reasons. This inevitably leads some well-meaning person to scold me on how this will lead people to call SS "welfare" and then its all over for Social Security. That is total rubbish, even if you do call it welfare, nobody is cutting grandma's checks off....she's the only person who is guaranteed to show up on Election Day!

Seniors are the most powerful interest group in America, but somehow people still think to this day that any minute the rug is going to get yanked out from under Social Security or Medicare. Who are these politicians that arent terrified of seniors?? If there's one thing that unites America's two political parties it is senior citizen worship. I mean, the most recent proof of this is the passage of Medicare Part D....by the most conservative president and Congress we've ever had.

Posted by: zeppelin003 | December 9, 2010 2:15 PM | Report abuse

@zeppelin:

They had no problem gashing SS in the early 80s. All you have to do is make sure your changes don't effect any of today's elderly.

Posted by: eggnogfool | December 9, 2010 2:27 PM | Report abuse

"Historically, Social Security has paid for itself through payroll taxes. But because Americans began having fewer kids during the 20th century, it's no longer paying for itself through payroll taxes."

This is a stunning factual error, and after reading this I can't take the rest of the post seriously. How does a federal policy wonk forget about the Social Security surplus?

Before the reform of 1983, Social Security paid for its current needs out of payroll taxes but was not funding its future commitment. Since 1983, Social Security has collected far more in payroll taxes than it needed to pay present benefits, and thus funded much more of its future commitment (though not all).

Posted by: J_Whick | December 9, 2010 2:34 PM | Report abuse

@zeppelin

If you means test SS you will have to vastly increase the bureaucracy which will prolly eat up any savings, and this means testing will have to be done every year for everybody based on their changing incomes, and geez! think of the trouble having to fact check their incomes.

Posted by: rjewett | December 9, 2010 2:46 PM | Report abuse

Medicaid has prospered? And the EITC? Wow. Who knew.

You're wrong on this. Read this to start:
http://www.huffingtonpost.com/rj-eskow/obamas-tax-holiday-a-pois_b_793526.html

FDR also said, "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program."

Posted by: eRobin1 | December 9, 2010 2:48 PM | Report abuse

My goodness, how politically naive! Ezra's premise apparently is that legislators care whether poor old people starve. Evidence?

Naw -- a program for everyone has a constituency. A program only offered as charity for the unworthy and insolvent has none. That's the object of moving funding to the "general fund" (the slush fund for the military and big political donors).

Uncap FICA!

Posted by: janinsanfran | December 9, 2010 2:48 PM | Report abuse

"If you means test SS you will have to vastly increase the bureaucracy which will prolly eat up any savings, and this means testing will have to be done every year for everybody based on their changing incomes, and geez! think of the trouble having to fact check their incomes."

Cut it out.

Donald Trump is a very rich man, you know how we know....taking 10 seconds to look at his 1040 form for the last 10 years! The idea that when he reaches 67 the government has to send him hundreds of dollars for the next 25 years, or Social Security will get gutted someday is just paranoia.

Posted by: zeppelin003 | December 9, 2010 2:51 PM | Report abuse

Means testing SS will mean it's no longer a program for everybody, so it will lose support amonmg those who contribute to politiicans, who will then vote to slash it.
Also, how is it fair to make the "rich" pay into it their whole lives and get nothing in return?

Posted by: rjewett | December 9, 2010 3:08 PM | Report abuse

For those of you who disagree with Ezra, contemplate that below is the logical outcome of your position that SS should be self-funded:

You should just convert SS into a defined contribution retirement plan that invests FICA taxes of each taxpayer into their very own Treasury Managed Mutual Fund Account (TMMFA).

The US Treasury would actually take FICA contributions and purchase Treasury Debt on the open market. Taxpayers would be issued shares in this mutual fund equal to their (and their employer's) FICA contributions comprised of a pool of 100% safe US Treasuries. Their investment would grow according to the blended yield of the portfolio. Interest accruals could be paid out in the form of shares based on Net Asset Value (NAV) instead of additional Treasury purchases. There would be no negative impact to the cash flow of the federal budget that occurs in privatization plans proffered by Bush, et. al.

This scheme would simply stop adding Trust Fund Bonds and start using real bonds where the US Govt. has a legallyy-enforceable contractual obligation to pay the TMMFA holder a specific sum of money. Overall outstanding US Govt. debt amount would be unchanged. However, the percentage of its composition between publicly held debt and intragovernmental debt would tilt toward publicly held debt.

This would allow taxpayers could boast that they are only receiving in retirement what's owed to them, and we could actually hold them accountable to that boast.

This would end the silly debate about what the "retirement" age should be and all the other nonsense created by the current defined benefit plan structure of SS. A defined contribution plan caps the taxpayers' liability to the balance in the TMMF.

Of course, we'd have to add provisions that prevent silly seniors from withdrawing too much money too early where they'd run the risk of outliving their savings. However, they could pass their unused portions of TMMFA on to their surviving beneficiaries. This would solve all the discriminatory elements of SS that favor women, whites over blacks, and other sub-groups with longer life spans.

I know there's a disability component to SS, but that could be funded by setting aside a fraction of the FICA contribution for disability insurance based on sound actuarial principles practiced by insurance companies that run solvent disability insurance programs.

Yes, it sounds very Republican-friendly which is why you should listen to Ezra when he gives you good advice!

Posted by: ElGipper | December 9, 2010 3:11 PM | Report abuse

It's well past time to put the insurance aspect the the "Old-Age, Survivors, and Disability Insurance (OASDI) program" at the forefront. It should be a optional hedge against being destitute not a guaranteed pension. I should not have to subsidize another person's retirement.

Keep in mind, if you're single and have no minor children, you can pay in your entire career and get nothing if you die before you reach eligibility age. nothing to pass on to your estate for all the contributions you've made. some social compact. If I could opt out today I would. The system can keep the 15 years of taxes I've paid.

Posted by: NoVAHockey | December 9, 2010 3:23 PM | Report abuse

Both Ezra Klein and his critics are, I think, missing the point here. The virtues of the Social Security payroll tax vs. other sources of revenue, is not at issue.

Saying that the payroll tax holiday will be 'paid for' by the general fund, just means that a portion of Social Security expenditures will add to current deficits. The foregone taxes are not to be replaced by other taxes. They are to be eliminated.

How long that elimination lasts, is a separate issue, no different for Social Security's new portion of the federal deficit than for any other part of it.

The point is that there is no reason Social Security should be held to an extraordinary standard of austerity. It should have the same ability as any other government program to benefit from the federal government's capacity to deficit spend.

Posted by: amileoj | December 9, 2010 4:50 PM | Report abuse

Ezra, you're way off base. First, SS is paying for itself through the late-2030s, according to the projections. Some of the benefits are and will be paid from the Trust Fund's interest and then principle. (Sorry if some people don't like to be taxed or to borrow to pay off debts when called-in, but personally I don't like the idea of the government defaulting on debt. SS contributors put that money into the Trust Fund precisely for the purpose of taking it back when baby boomers are retiring.)

Second, you ignore completely that all SS contributors sooner or later fully expect to reap benefits that they earned through sacrifice, and therefore they do defend SS politically like they are defending their own bank accounts. As they should. This is very different than supporting a "popular" program.

Third, SS's shortfalls beginning 25-30 years from now can be handled in ways other than cutting benefits (or raising the retirement age, which also is a benefits cut). SS income can be increased in a couple ways that are not burdensome, maintain the system's integrity, and fully guarantee scheduled benefits.

Finally, you're politically playing into the hands of SS privatizers who think they (and all others) are as smart as Buffett and surely not as dumb as all those former low- and mid-level Enron employees. The SS system actually works and you are supporting moves to undermine it rather than strengthen it.

Posted by: pjro | December 9, 2010 5:37 PM | Report abuse

"Cut it out.

Donald Trump is a very rich man, you know how we know....taking 10 seconds to look at his 1040 form for the last 10 years! The idea that when he reaches 67 the government has to send him hundreds of dollars for the next 25 years, or Social Security will get gutted someday is just paranoia."

zeppelin003,

Okay, so you can save several hundred million worth of benefits on the super rich. That's what, 0.1% of the shortfall?

If you means test away benefits for people with $300,000-$500,000, young people who can save that much simply won't. You're back to square one.

If you means test only the super rich, well, you won't really save any money.

Posted by: justin84 | December 9, 2010 6:10 PM | Report abuse

@ElGipper:

SS is social insurance. It's not a 401(k). The idea is the people who die young subsidize those who die old--because being dead is cheap. If you converted it into a 401(k) you'd have to massively raise everyone's contributions.

Ezra must think quite a lot of himself to be second-guessing FDR. Republicans are not going to let Social Security be partially-funded from general revenues indefinitely. They are making a one year investment to confuse the public in anticipation of slashing the program. Democrats were very foolish to fall for it.

Posted by: bmull | December 9, 2010 9:21 PM | Report abuse

Ezra,

I am disappointed. Since you used the words "the problem of the trust fund," in your title, I thought you were finally going to spill the beans about the real problem with the trust fund like many of your fellow journalists, including Allan Sloan, Eric Schurenberg, Jay Bookman, Terry Savage, and Steve Vernon, have already done. All of the above have acknowledged the fact that every dollar of the approximately $2.5 trillion in surplus Social Security revenue, generated by the 1983 payroll tax hike, has been spent on programs unrelated to Social Security, leaving nothing to invest.

I have been researching and writing about Social Security funding for more than a decade. During that entire period, I have been trying to alert the public to the fact that all the surplus Social Security revenue has been diverted to the general fund for the past 25 years and spent on such things as tax cuts for the rich, wars, and other government programs. The only thing in the trust fund is non-marketable IOUs that cannot be sold to raise money for paying benefits to the baby boomers.

Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University
Website: www.thebiglie.net
Email:ironwoodas@aol.com
Phone: 1-800-840-6812

Posted by: ironwoodas | December 9, 2010 9:55 PM | Report abuse

The American people have been hoodwinked by their government for the past 25 years to believe that the surplus Social Security revenue, that was supposed to be going into the trust fund for the retirement of the baby boomers, was indeed being invested in marketable U.S. Treasury bonds. The official website of the Social Security Administration has for years stated that Social Security revenue, not needed to pay current benefits, is invested in government securities. There is only one problem with that statement. It is not true, and it has never been true. Social Security contributions, not needed to pay current benefits, are diverted into the general fund and spent on whatever the government chooses to spend the money on. The government issues what are called "special issues of the Treasury" to keep track of how much Social Security money has been spent on other things. They are simply an accounting record of the government's debt to Social Security.

I stumbled onto this information more than a decade ago, and I have been trying to alert the public to the scam ever since. Only recently have journalists begun to report these facts. Steve Vernon of moneywatch.com wrote an excellent article on the true status of the trust fund, entitled "Social Security and the Federal Debt: Why You Should Be Worried," on April 18. http://moneywatch.bnet.com/retirement-planning/blog/money-life/social-security-and-the-federal-debt-why-you-should-be-worried/1608/

Steve says "the Social Security trust fund is invested in $2.5 trillion of future tax collections." He is absolutely corrects. The money has already been spent, and the trust fund has no more assets today than it would have had if the 1983 payroll tax hike had never been passed. Anyone can go online and check out the federal budgets for the past 25 years. What they will find is that the government spent all of its general revenue, plus all of the Social Security surplus revenue, plus additional borrowed money. Money can be spent or saved. If it is saved, it can also be invested. But if it is all spent, there is nothing left to invest. Since all of the surplus Social Security revenue was spent on other programs, and none of it was saved, there is no way that any of it could have been invested in anything!

Allen W. Smith, Ph.D.
Website: www.thebiglie.net
Email: ironwoodas@aol.com
Phone: 1-800-840-6812

PLEASE FEEL FREE TO CONTACT ME. I NEED YOUR SUPPORT AND HELP IN GETTING THE TRUTH ABOUT THE SOCIAL SECURITY TRUST FUND MADE PUBLIC. IT IS TIME FOR THE AWFUL SECRET ABOUT THE TRUST FUND TO BE EXPOSED. THE GOVERNMENT MUST REPAY THE LOOTED SOCIAL SECURITY MONEY!

Posted by: ironwoodas | December 9, 2010 11:00 PM | Report abuse

I heard you out. You didn't persuade, AT ALL.

To understand why, you need to understand pension accounting and you need to read a little history of why it is important.

Broadly, you should hear me out. Ezra, you were laudatory of the HCAA, because it put control of costs outside the grubby hands of politicians, right?

That's what pension accounting is good for, in part. In days past, corporations passed out retirement promises, then didn't fund them. Congress put an end to these abuses. It should simply do so for itself, too, i.e the "lock box" of yore. In other words, the opposite direction of what you argue.

Demographic boom-bust is not an argument against actuarial calculations and apt/conservative of funding pensions. In fact, it was the wise use of pension accounting that motivated the Greenspan panel to raise the dedicated savings tax so that the baby-boom generation would pay for its retirement, over the 90s and aughts.

The $260 billion we are talking about in foregone, dedicated savings will triple - triple! - the actuarial imbalance of the program, from 2% of payroll to 6% of payroll.

I would say that a dedicated tax is neither progressive or conservative. It is just smart and prudent financing.

Now, you can argue that it's all just a general claim on the US Government, despite the fancy accounting. That's fine, but begs the question or misses the point. The history of going in the wrong direction of financing of this type is to make that matter worse - no one ever got more "security" from it, let's say, at a minimum. When there are surpluses in the Social Security program, the U.S. should be paying down outstanding debt-in-public-hands, in the current period, so that it has the borrowing capacity when there are deficits later on.

The Bush-43 years were a horrible betrayal of that principal, and now Obama-Summers are piling on.

I agree they cuts are more regressive than income taxes. That makes them tempting, but I hope I've shown they are NOT an apple fit to eat!

How many financial advisers say, "Don't raid your 401(k), if you can avoid it at all!" This is sound advice. Why would we just ignore it and raid our public pensions?

Posted by: Amphigory | December 10, 2010 12:19 AM | Report abuse

Let me also say that tripling the actuarial imbalance of the program may make it impossible for liberals to argue that lifting the cap on taxable wages (aka 'FICA wages') is enough to bring the program back or sufficiently close to being in balance.

That really does seriously open the door to cutting benefits.

And in the broadest picture, what we're doing with this is saying that the cost of the failed Bush years and Wall Street's malfeasance is going to be paid in later retirement ages and/or fewer benefits.

Respectively, I think those things should be paid for (a) Bush's political base (b) _current income_ of all Americans rather than out of retirement 'security'.

Whether you or anyone agrees with me or not, I think it is only honest to lay out the choices to the public in the way, not mask the choice in the language of "payroll tax", which is a term that masks the choices on the table.

Posted by: Amphigory | December 10, 2010 12:31 AM | Report abuse

If you need further evidence, there was a time that some corporations got so far behind on their pensions that the FASB, which had a different name back then, had to allow something called a "pension transition liability", so they could cut over to the new rules slowly, without wiping out the company's equity (yes, all the equity, not just some!).

I don't want to overstate, however. As you know, the go-go Reagan era of the mid to late 80s included a LOT of people get fabulously wealthy doing leveraged buyouts/takeovers, which often included raiding overfunded pensions.

Posted by: Amphigory | December 10, 2010 12:42 AM | Report abuse

when I wrote, above:
"(b) _current income_"
it might be better:
"(b) _current_ savings of those who can afford to do so immediately and the _current consumption_ of the vast majority who will need to cut back in the mid-term, assuming economic recovery.

Posted by: Amphigory | December 10, 2010 12:50 AM | Report abuse

Thank you very much! Here is my 2 cents, I just printed Coupons for free. You can print coupons before you shop by searching "Printapons" online

Posted by: Tonyaharris1 | December 10, 2010 2:43 AM | Report abuse

Ezra, before saying you "don't buy it," try learning the history of the program. You have no business sounding out your ignorant views on this subject. It's an outrage, and perhaps someday you'll become knowledgeable enough to understand why.

Posted by: urbanlegend | December 10, 2010 3:23 AM | Report abuse

Ezra Klein proposes that he is much smarter than FDR and other Democratic politicians. - Epic Fail.

Posted by: elemming | December 10, 2010 3:27 AM | Report abuse

Everything Allen W. Smith says here is false. Not one penny has been "diverted" into the general fund. Former professor Smith apparently does not comprehend the words, "Backed by the Full Faith and Credit of the United States Government."

That's a matter of law. It's totally irrelevant whether the securities are marketable on the general market or not. They have a certain customer that by law must pay them off when they come due -- i.e., when the money is needed to pay benefits. That customer is the United States Government. If it refuses to pay them off, it is defaulting on its obligations. The U.S. government will not default on its obligations.

Folks, the right wingers have been trying for three decades to scare you into believing you will never receive your Social Security. You will, if you make sure these dangerous people keep their filthy hands off the program.

Posted by: urbanlegend | December 10, 2010 3:34 AM | Report abuse

Wow - you took a position where Liberals may disagree with you! How brave. I'm impressed. Next you may even disagree with Obama.

Posted by: marknelso | December 10, 2010 7:01 AM | Report abuse

Wow - you took a position where Liberals may disagree with you! How brave. I'm impressed. Next you may even disagree with Obama.

Posted by: marknelso | December 10, 2010 7:01 AM | Report abuse

Its incredible. We are in a period where governments around the world are bending over backward to make sure all kinds of private debt gets repaid in full (think AIG), yet it is possible that the US government will not repay the amounts borrowed from the social security trust fund since the Greenspan reforms of the 1980's. Interesting how only some promises need to be kept. Also, repaying the trust fund should come from increasing the tax on the wealthy. Asking the middle class to pay taxes to repay social security will mean that they have paid twice -- once thru their payroll taxes and now their regular taxes. That can't be the solution.

Posted by: steveds1 | December 10, 2010 9:34 AM | Report abuse

A jew speaks. Hilarious.

Posted by: elg6 | December 10, 2010 5:42 PM | Report abuse

elg6,

That's disgusting.

Is anyone at the Post paying attention? Why is this comment still on the site?

Posted by: ML777 | December 10, 2010 8:12 PM | Report abuse

To understand replacing SS taxes with General Fund taxes you need to understand how this opens up the way for "means testing".
In Britain this has resulted in a populace who believe it is useless to save for retirement because the government will means test you to the point where you have to spend your savings before you are entitled to collect on government retirement plans.
So, they mostly don't save.
Read the article and some of the comments following and you will understand what I am saying here.

http://www.thisismoney.co.uk/pensions/article.html?in_article_id=514506&in_page_id=6&expand=true#StartComments

Posted by: CSainte | December 11, 2010 4:41 PM | Report abuse

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