Social Security in Violent Transition?

Jackie Calmes at the NYT has a good summary regarding the last minute effort to get an extension of the 2% payroll tax reduction for 2012. (There is consideration this morning for a two month extension) There are some subtleties of the debate that are worth noting. Both sides agree that an extension should happen, but within both parties there is surprising opposition. The lovers of Social Security see the handwriting on the wall. They fear that a second year of a payroll tax break may be the last step leading to significant changes in America’s biggest social program.

However, that the payroll reduction hurts SS is a common misperception. That’s not correct. Every month, the Treasury transfers cash to SS in order to make up for the shortfall. I follow this stuff; if these transfers had not been made, I (and a bunch of others) would have blown the whistle months ago.

As a result of these transfers, SS ends up unharmed by the tax break. Other taxpayers foot the bill. But since we have a deficit to begin with, this just adds to the countries red ink. Uncle Sam is digging into one pocket and transferring wealth to SS. This is the socialization of Social Security. What does it mean if SS becomes a ward of the state? Charles Blahous, an ex Bush advisor had this to say:

“The payroll-tax cut would take a major step toward transforming Social Security from what it has long been — an earned benefit, funded by separate worker payroll taxes — into an income-tax based system more akin to welfare.”

For years the SS defenders have pointed out that SS is self-funding and does not contribute to the deficit. That was not true in 2011 (to the tune of $115b). The on-budget expense/increase to public debt will be $120b in 2012. That’s real money.

It’s an unfortunate fact that the US economy will flounder if workers pay only 2/3rd of the statutory rate in 2012. That’s how fragile the economy is. It’s not likely that things will be much different a year from now. Another “one time only’ extension of the FICA tax breaks will be on the table twelve months from today. From the Times:

Robert Reischauer, Ex CBO and SSA.
“Imagine that next December the unemployment rate is 8 percent and a year later it’s 7.4 percent. We’ll still be trying to stimulate employment and terminating the payroll tax holiday will be a big hit on most families, one that will hurt job growth.”

Reischauer is right, we will not revert to the statutory rates, much less the 1% increase that is require to stabilize SSA. I think he’s also correct with his projection of a huge fight:

“The nightmare that I have is that when it comes time to raise the tax back up to 6.2 percent, conservatives are going to propose that these two percentage points of payroll tax be devoted to individual accounts. That will precipitate a huge fight and could change Social Security in a fundamental way.”

There is a huge brawl in front of the country on this issue. Folks on both sides are deeply entrenched. The following is an exchange I saw on Angry Bear blog. It’s an example of the rhetoric we will get, The fellow who wrote this, Dale Coberly, is a fairly well-know contributor to the SS debate. Dale loves SS and hates anyone who thinks that changes are required. If you have any doubts how visceral a fight we’re in for, consider this bit of fluff:

just a heads up…

Bruce Krasting says Social Security 2011 – Another Bad Year…he concludes: The current thinking is that SS is a problem that can be worried about in another ten years or so. That’s simply not true.
12/08/2011, 13:00:51
– Reply


there are bigger liars than Krasting writing about SS. I can’t keep up with them all, and with Obama killing SS outright with the permanent payroll tax holiday, and the Democrats and Progressives rallying behind him, there is nothing more I can do.

Maybe Krasting will be out of a job soon.

The stalwarts of SS recognize that the program is now vulnerable. They want bad things to happen to those who believe changes are essential. We’re going to have a fight. A big one. Think, “Age Warfare”.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

Visit: Bruce Krasting's Blog

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