President Obama and the Republicans will say that the payroll tax holiday is all about stimulating the economy. But don't be fooled. According to the Center for Budget and Policy Priorities, there are many better ways to stimulate the economy with that $120 billion the payroll tax holiday will cost, including simply extending the Making Work Pay Tax Credit. See "Payroll Tax Holiday a Poor Stimulus Idea," available at this link.
And the other, better forms of stimulus pose no threat to Social Security. The innocent-sounding payroll tax holiday, on the other hand, will lead inexorably to killing Social Security. Let me explain:
Sixty members of the Senate are unwilling to raise taxes evenon those earning over $1 million. Given that unwillingness to raise taxes by less than a nickel on every dollar earned over $1 million, I find it unfathomable that a more conservative Congress, in two years, heading toward an election, will increase the payroll tax by 2 percent on the very first dollar, and every other dollar up to the cap, earned by virtually every single worker in the country. This would amount to a 30 percent tax hike on what workers would have then been paying. Consequently, I think we have to assume that the payroll tax holiday will be extended beyond the two years the president is proposing and quite likely could become permanent.
That means that the federal government will have to continue to transfer $120 billion to the Social Security trust funds each and every year even as it has to transfer more and more interest payments as the trust funds continue to grow and as interest rates return to more normal levels. Unless Congress acts to restore Social Security to solvency, the Treasury bonds held in trust will have to be redeemed, again on top of that new $120 billion transfer from the general fund, starting fifteen years from now, assuming Congress even continues to make the $120 billion every year before that point. These dollars will be competing with dollars for defense, environmental protection, education, school lunches, Food Stamps, Medicare, Medicaid, SSI, Pell grants for low income college students, and every other good and service financed by the federal government.
A permanent two percent cut in Social Security contributions doubles the 75 year projected shortfall. Scrapping the cap (eliminating the $106,800 maximum on earnings), tonally eliminates the shortfall today. If FICA is cut by 2 percent, scrapping the cap gets Social Security only halfway there.
The pressure to cut Social Security in a slow, gradual way for younger workers will be enormous. Progressives will not want to cut benefits for the low-income - and they shouldn't be cut; they should be increased. Despite the fact that there are few beneficiaries who do not desperately need their Social Security - 2/3rds of the elderly and 70 percent of people receiving disability benefits rely on Social Security for half or more of their income and most people think even more people will be dependent on it in the future - nonetheless, means-testing Social Security will become a viable option. (Eliminating the benefits of those who don't need them will make no difference to the solvency of Social Security, but will introduce administrative complexity, because it will require everyone claiming benefits to reveal their income and assets, to show they are of insufficient means to get by without it, and will destroy the universal, insurance nature of Social Security.) Changing the benefit formula in the manner proposed by a majority of the Catfood Commission, will appear attractive, even though it would gradually and inexorably eviscerate the benefits of the middle class, and with it, their support for the program.
Conservatives, from the moment Social Security was introduced in 1935, resisted a highly redistributive middle-class program, based on insurance principles. Throughout the past 75 years, they pushed for a program that mainly helped only the very poorest Americans by providing either a means-tested program or a low level of benefits for everyone, if they had to, paid from general revenue, but Democratic politicians were too smart to fall for that. They recognized that, not only did the middle class, not just the very poor, need economic protection in a capitalist system, but also that only programs that had broad based support, which provided meaningful benefits to the middle class, could offer meaningful benefits to the poor, as well. They understood the adage that programs exclusively for the poor made poor programs. One Democrat who understood this all very clearly was the one who created Social Security: President Franklin Roosevelt.
FDR recognized that a visible dedicated contribution makes it both politically and morally difficult for future politicians to cut Social Security. When pressed about the impact of payroll taxes on the economy, FDR said:
"I guess you're right on the economics. They are politics all the way through. We put those pay roll 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. Those taxes aren't a matter of economics, they're straight politics."
The fact that the Republican idea of scrapping the payroll tax is being touted as a concession made to the Democrats by the Republicans, shows just how hapless and clueless President Obama and his advisers are. Today's Democrats seem to be able to win electorally when the Republicans start two endless wars and destroy the economy but they seem incapable of presenting a compelling vision of what they are for. Social Security is the nation's most progressive program, but it is not a progressive issue. It is overwhelmingly popular with the vast majority of the American people, including the Tea Partiers. Today's Democrats fail to understand the program, and so are not only blind to subtle assaults against it, but seem to conspire in those assaults. All I can say is that with the Republicans and the Democratic President, perhaps unwittingly, conspiring to destroy Social Security, the American people don't stand a chance.
This post originally ran on FIREDOGLAKE and has been slightly edited from its initial posting.
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