Advancing a Free Society

The Payroll Tax Cut: Ending Social Security as We Know It?

Monday, December 12, 2011

This AM e21 published my piece "What's in the Social Security Trust Funds, or: Why Continuing the Payroll Tax Cut Could Eventually End Social Security as We Know It.”  I wrote this piece to circulate visual information that might make it easier for people to understand the potential magnitude of the proposed change to Social Security financing. Excerpts:

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The ongoing effort to partially convert Social Security from payroll-tax-financing to income-tax-financing – by further cutting the payroll tax as a stimulus measure and replacing the funds with general revenues – may in short order put an end to the longstanding conception of Social Security as a benefit earned by worker contributions.

The picture here (link to piece to see) divides Social Security’s $2.68 trillion Trust Fund balance (projected for the end of this year) into three pieces:

A: Surpluses of past program tax collections over expenditures (35%);

B: Subsidies from the general government fund (5%);

C: Interest credits (60%).

Each of these three financing categories bears differently on the question of whether Social Security is a self-financed, earned benefit program.

It is unequivocal that piece A represents an extent to which Social Security participants have paid for benefits.

It is unequivocal that piece B undercuts the view that Social Security is self-financing.

Piece C is arguable: one could construct a theoretical argument either way, though the empirical evidence favors the view that it is, like piece B, a subsidy from the general fund.

Suppose that the proposed policy were adopted of extending and deepening the current payroll tax cut. By the end of 2012, the Trust Funds' components would look like this:

A: Surpluses of past program tax collections over expenditures (24%);

B: Subsidies from the general government fund (14%);

C: Interest credits (62%).

At what point would perceptions of Social Security being an “earned benefit” be irretrievably changed? Two approaching milestones might be worth noting:

If the proposed policy were adopted and then later extended, then by June 2013 the share of the Trust Funds attributable to general revenue subsidies would actually exceed the share attributable to past net surpluses of tax income over expenditures (i.e., B > A).

If, hypothetically, the policy were adopted and extended indefinitely, by early 2015 the entire $3 trillion balance of the Social Security Trust Funds would be attributable to general revenue subsidies and interest credits (i.e., A < 0).

How would the public regard a Social Security Trust Fund that consisted entirely of general revenue subsidies and payments of interest between government accounts? Would they continue to regard Social Security as a truly “earned” benefit? There’s no way to know. But one thing is certain: further continuation of the policy of replacing payroll taxes with income taxes will test perceptions of Social Security as an “earned benefit” to a degree that they have never been tested before.