Dec 6, 2010

FICA Tax To Drop For One Year

From the New York Times:
President Obama announced a tentative deal with Congressional Republicans on Monday to extend the Bush-era tax cuts at all income levels for two years as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy. ...

It would reduce the 6.2 percent Social Security payroll tax on all wage earners by two percentage points for one year ...
I have a couple of concerns:
  • If the reduced payments into the trust funds are not made up in some fashion, Social Security's long term financing problem will be made significantly worse. It will be fine in a sense if they are made up out of general revenues -- or more accurately, out of Treasury borrowing -- but this puts us possible on a path towards the end of a dedicated financing mechanism for Social Security, which puts Social Security at more risk. Of course, there are some on the left who may favor this because FICA is regressive but there are even more on the right who would favor this since it would make it easier for them to categorize Social Security as "welfare."
  • This recession is not going to end in the next year. How do you allow the FICA tax to go up dramatically a year from now? If you do not let it go back up, Social Security has an impossible long term financing problem without applying general revenues which leads us back to my first point.
Update: The Washington Post says that the FICA reductions will be made up to the Social Security trust funds out of general revenue.

5 comments:

Anonymous said...

There is no "real" money in the trust fund, just a bunch of IOU's from the Treasury. These IOU's (Treasury Bonds) will have to be paid out of General Revenue just like the deficit created by the reduction of the payroll tax. We will just borrow more from China or "print" more money. Essentially, we are going to covert IOU's to SSA into IOU's to China and/or monetize the debt. So don't worry, be happy.

Anonymous said...

Glad the children that run this country could do something to "stimulate" the economy and increase the deficit at the same time. Brilliant.

Don Levit said...

Aononymous number 1 is correct.
There are no dedicated funds going to the trust fund, for all the FICA dollars go into the Treasury. The FASAB, which is the accounting advisor for the federal government recognizes this, and is considering changing the terminology of earmarked funds to that of general revenues.
I can provide governmental links and excerpts to support my statements to those who are interested.
Don Levit

Anonymous said...

I must admit that I don't know all of the details here but, my concern is that when there is less money in the "trust fund" (whatever that is), it will provide another excuse for the Social Security haters to use to try to privatize the program or get rid of it completely.

Don Levit said...

anonymous:
What you said makes a lot of sense, if the trust fund numbers actually represented a store of wealth. They do not. The benefits paid are the same process as paying for battleships, out of current revenues and debt.
In a paper entitled "Medicare Financial Status, Budget Impact, and Sustainablility - Which Concept is Which," published by CMS and HHS:
On the first page is a subheading with the title "Trust Fund Versus Budget Perspectives." If you read through this for the next few pages, you will get a pretty good idea of the 2 perspectives.
Page 130 - "The assets in the trust fund accounts represent the statutory authority to draw on the general fund of the Treasury, as needed, to make payments without the need for an appropriation from Congress.
Each day, Part A expenses for that day are paid by the general fund of the Treasury, and the trust fund assets are reduced by the amount of the expenses.
In practice the asset is simply deducted from the trust fund, and the general fund is authorized to make the outlay on behalf of part A."
The cash can't be in both places - the Treasury and the trust fund. The cash is in the Treasury; the trust fund is an accounting mechanism.
http://www.cms.hhs.gov/HealthCareFinancingReview/downloads/05-06Winpg127.pdf.
Don Levit