Many on the left are attacking the tax compromise on the ground that the one-year, two-point payroll tax holiday will undermine the Social Security system. See, for example, “Tax Cut A Hidden Threat to Social Security” and “The End of Social Security.” Today The Hill took note with “Liberals warn payroll tax cut is a threat to Social Security.”
The logic is a little hard to follow, but liberals seem to assume that if the mythology that surrounds Social Security crumbles, the program itself will be doomed. The Hill explains:
Rep. Rush Holt (D-N.J.) warned the provision could dismantle Social Security’s ownership-based funding mechanism, in which workers pay into the program while they’re employed to tap the benefits in retirement.
“It undermines the very rationale of Social Security in ways that could do long-term damage,” Holt said. …
The payroll tax holiday is scheduled to expire at the end of 2011. But critics contend there will be little appetite in Congress to return the tax to 6.2 percent in 2012 — a move likely to be packaged by anti-tax advocates as a 48 percent tax hike in a presidential election year.
“There is a real danger … that it will be changed into a permanent deduction,” said Max Richtman, executive vice president of the National Committee to Preserve Social Security and Medicare, an advocacy group. …
With the country’s newfound focus on deficit reduction, the liberals said, backfilling the trust fund with borrowed money will leave Social Security vying for funds against other discretionary programs, like public television and national parks.
It will be understood, in other words, that there is no real link between Social Security taxes and Social Security spending–something that has been true for many years. A knowledgeable reader explains what is going on:
[W]hat I find astonishing about all these critiques from the left is the —- apparently completely sincere — laughably earnest and detailed discussions of the “Trust Fund” mechanics as though it had any bearing on reality at all….there IS NO Trust Fund in any identifiable economic sense. It’s just a bookkeeping construct….as everyone who has the most casual acquaintance with the Social Security scheme immediately apprehends!
So the IRS collects the 6.2% payroll tax which is assigned an accounting treatment as an entry into the “Trust Fund,” and which is immediately replaced with a “Bond” from…the Treasury…which takes the cash and spends it like any other government receipt, as has virtually always been the case. So the concern expressed is that instead, only 4.2% payroll taxes will “go into” the “Fund”….and the “shortfall” will be made up by a general revenue input “into” the “Fund”…all of which is immediately replaced by a “Bond” and spent….so there is ZERO substantive difference.
Social Security has always been run on a current cash flow basis with no funded assets. Having the “Trust Fund Bonds” when SS is not current on a cash flow basis just means that the government pays from OTHER current cash flow or issues new debt — not internally to itself like the “Trust Fund Bonds” — but to the public…..which is exactly IDENTICAL to not having had a “Trust Fund” in the first place!
Of course, politically, it is a different matter as these lefties well know….the accounts, “Trust Funds”, etc. is just léger-de-main to trick the rubes into thinking there is something like a funded retirement plan, when in reality it is just a particular regressive tax scheme irrationally linked to a particular benefit scheme. If the actual mechanics and legal status of the program were widely and well understood it would be seen as, with respect to the retirement benefit, a Ponzi scheme on the one hand, attractive only to retirees and near retirees as relatively early entrants; and, with respect to a safety net provision, a simultaneously redistributive and non-means tested welfare benefit on the other.
The 2% payroll tax deduction, especially if it requires a specific vote to be re-instated, acts as the thin edge of the wedge for large scale entitlement reform….and one likely to be based on “defined contributions” and market values not a defined benefit. This is an astonishing and unprecedented concession by the guardians of the entitlement state…and the serious left knows this.
I certainly hope that turns out to be true.