Monday, December 05, 2011

Obama and Social Security

President Obama is trying to make incremental changes in Social Security that will eventually change it in fundamental ways. It started last year in the deal over extending the Bush tax cuts. Part of the deal included a cut in the "payroll tax". This is the term that the Obama administration uses for the tax that funds Social Security.

FDR's grand bargain worked like this - everyone who works pays into Social Security* and everyone can collect when they retire based on what they paid into the system. This gives the impression that Social Security is a retirement account which accounts for a lot of its popularity. Retirees feel that they earned their benefits by paying into the system their entire working life.

Social Security is actually a pay as you go system. For most of its existence it has run a surplus which is immediately lent to the general fund at interest and spent. Demographics say that soon, Social Security will start running a deficit and have to redeem the loans. Eventually it will run out of money and only be able to cover 70-some percent of its expenses.

By cutting the payroll tax, Obama pushed Social Security into deficit years early. It has survived the year by redeeming its loans (known as special bonds).

The payroll tax cut has not helped the economy much. Like the Making Work Pay Act, it's effect on the average paycheck is small enough to go unnoticed. Regardless, the Obama administration is making two efforts. One is to extend the tax cut and offset it with a surcharge on the rich (this time defined as people making at least $1,000,000 instead of $200,000). The other effort is the jobs bill. This would provide further cuts to Social Security and would cut the employer's share as well. This did not name any off-setting taxes but the bill calls for a tax increase on the wealthy.

If Obama is reelected and especially if he gets a Democratic majority in Congress then I expect to see this trend continue - shifting Social Security taxes from lower-wage workers to the rich. The reason for this is that many liberals consider the Social Security tax to be regressive. It is the same rate for everyone and it is only paid on the first $200,000. Anyone who makes more that that amount will pay a smaller portion of his income in Social Security taxes.

The outcome of this will be to remake Social Security into an income transfer system taking money from the rich and giving it to retirees. It will break FDR's grand bargain. The good news for conservatives is that this will make Social Security easier to reform. The current argument that "I paid into it so I earned my benefits," will be eliminated as it is turned into welfare for the elderly.

A change of this magnitude should be openly discussed instead of hidden behind the euphemism "payroll tax cuts".

* Note - under FDR's original system a lot of people including government and farm did not pay into the system. It was later expanded to include almost everyone although government workers still have their own retirement systems.

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