Monday, September 12, 2011

Why Does Obama Hate Social Security?

Last December, as part of a package to extend the Bush tax cuts for everyone, Congress passed a temporary reduction of Social Security's payroll tax dropping it from 6.2% to 4.2% of the first $106,800.

In last week's jobs speech, Obama proposed dropping the payroll tax to 3.1% and reducing the employers' share.

Why does Obama like reducing this tax so much? Probably because you only pay it on the first $106,800 and it was a simple way of limiting the benefit of the tax break that the rich received.

Reducing the employers' portion reduces the expense of having employees. In theory, a company with 100 employees could use the tax savings to add two or three employees.

The President's proposals will not help the economy much. Getting an extra 1.1% take home pay is not likely to make people go out on a buying binge. For most people it will be eaten up by inflation.

Employers are not likely to use it to boost the workforce. For one thing, this will be a temporary tax cut. Why take on employees that you may have to lay off later? The only thing that will entice employers to hire more people is more economic certainty.

So, this will not help the economy recover. What about the damage to Social Security? The immediate effect is to cut the amount that Social Security has to work with at a time when enrollment is rising. This will either come out of the trust fund (which will require transfers from the general fund which will add to the deficit) or it will reduce surpluses going to the trust fund which will effect future payments. It also strikes at the heart of the social compact that Social Security is based on - everyone pays into the fund their entire working lives and in exchange are supported after they retire. Will we make corresponding cuts in future benefits?

Social Security has enough structural problems without adding new ones in the name of economic stimulus.

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