Bailout

Is Obama endangering Social Security?

By Felix Salmon

There’s a meme doing the rounds on the left, that giving employees a 2% break on their Social Security contributions for a year is, in Ryan Grim’s words, “a hidden threat to Social Security.”

At the heart of the logic is a quotation from FDR:

“We put those payroll 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.”

This logic is now being applied in reverse. It’s going to be politically difficult to increase employees’ payroll contributions by 50% in a year’s time — that’s a tax hike, and nobody likes tax hikes. So there’s a decent chance that they will remain at 4.2% rather than 6.2%, with the extra Social Security contributions being paid not by employers, and not by employees, but rather by the general fund.

Rep. Keith Ellison picks up the narrative, quoted in Grim’s story:

We’ll replace the loss of money from Social Security with general fund money, but in the past Social Security has been raided to help fund general fund programs. So how long will it be before somebody says Social Security is not sustainable and we need to cut the program?

This is where I lose the thread. As Ellison points out, it’s been uncontroversial for decades to use the Social Security surplus to help pay for non-Social Security programs. Why should it be more controversial to do things the other way around?

Kevin Drum had a fantastic explanation of how Social Security works back in August, along exactly these lines. The 1983 Social Security reform created a decades-long surplus, which could be used for other expenditure. Then, when Social Security fell into deficit, other taxes were always going to have to make up the difference.

People on the right who want to cut Social Security will always make a fiscal argument for doing so, talking about how it no longer pays for itself. They will do so no matter where the payroll contributions are set, and they would do so even if they remained untouched. Meanwhile, people on the left who want to save Social Security will scream bloody murder any time anybody suggests even something as small as raising the retirement age in 50 years’ time. Trying to get these two camps to come to agreement on anything will always be impossible. And I fail to see how adding the general fund to the payroll tax as a contributor to the Social Security trust fund is going to change that dynamic.

Mike Konczal reckons that we would be better off, politically, with a tax rebate out of the general fund rather than a reduction in payroll withholding. But that ignores the behavioral economics of the reduction in the withholding tax: people are more likely to spend a relatively invisible increase in their take-home pay, and they’re more likely to save, or deleverage, with a one-off rebate check from the government.

The debate, in a year’s time, about whether we should let the payroll-tax cut expire is going to be a fascinating one to watch. But I don’t think it’s going to have much if any effect on the future of Social Security.

Full post as published by Macroprudential on December 13, 2010 (boomark / email).