Popular payroll tax cut will cost Americans later
TERRY SAVAGE firstname.lastname@example.org February 19, 2012 3:28PM
Senate Finance Committee Chairman Sen. Max Baucus, D-Mont., left, reaches out to Rep. Fred Upton, R-Mich., on Capitol Hill in Washington, Thursday, Feb. 16, 2012, to celebrate as members of the bi-partisan House and Senate conferees on the payroll tax cut extension signed the compromise agreement. (AP Photo/J. Scott Applewhite)
Updated: May 3, 2013 12:15PM
Late last week, Congress passed the “Middle Class Tax Relief and Job Creation Act of 2012.” The law has a great name, designed to appeal to all voters. Neither the conservatives who worried about the cost, nor liberals who wanted more benefits, could stand in the way of its “bipartisan” appeal — especially in an election year!
(The new law also extends unemployment benefits, and makes sure that physicians receive appropriate reimbursement for treating Medicare payments. Those important issues really have nothing to do with either “middle class tax relief” or “job creation” — but they were thrown in as part of the political process.)
The real attraction for all smart politicians was the extension of the payroll tax cut. The Joint Committee on Taxation has estimated that approximately 170 million wage earners and self-employed individuals will benefit from the payroll tax reduction in 2012, an estimated average $1,000 increase in take-home pay in 2012. That’s the kind of action that really attracts votes.
But what will happen to Social Security? That’s an issue that should worry young and old alike.
Because that’s what the “payroll tax” is: the money taken out of your paycheck to pay for your future Social Security benefits. Or at least, that’s how the plan was first described when Social Security was enacted back in 1935.
Now here’s the accounting legerdemain that the politicians agreed to last week when they passed this bill, according to a tax briefing by the independent analysts at CCH:
Lawmakers agreed not to require the $93.2 billion estimated cost for the payroll tax cut extension to be offset by revenue-raising provisions. . . . Both parties agreed to offset the cost through transfers from the general fund of the Treasury to the OASDI trust fund.
Wait a minute. What “general fund” of the Treasury? They’re already running a deficit. Will they just borrow more money to make this “transfer?”
And, does anyone still believe there is really a Social Security “trust fund?” Yes, that’s the term that has been used since 1939 to describe the money being “set aside” to pay promised benefits.
But since 1969, the Trust Fund has been part of a “consolidated budget” — meaning that any surpluses in the trust fund are allowed to offset deficits in government spending. Yes, we’re already “using” the “assets” of the “trust fund” to partially offset the huge deficits the government is running every year.
Even more interesting, the law requires all money in the Social Security (OASDI) trust fund to be invested in “interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.”
According to Social Security’s own website: “Since the assets in the Social Security trust fund consists of Treasury securities, this means that the taxes collected under the Social Security payroll tax are in effect being lent to the federal government to be expended for whatever present purposes the government requires.”
So the political solution of “transfers from the Treasury’s general fund to the Social Security OASDI trust fund” to pay for this payroll tax extension is just accounting baloney!
Future Social Security
People believed in Social Security when it was first created. My Dad, who thankfully is approaching his 91st birthday, knows that the check he receives every month, and has since age 65, is a return of his original lifetime “contributions” to Social Security, made through the payroll tax. And more. That was the promise.
It’s the next generation — the baby boomers — who will first feel the impact of this current “payroll tax cut,” as well as the impact of longevity on the Social Security system. There’s simply no way we boomers will receive the benefits that my dad is reaping from Social Security.
The system will become “means tested” — meaning those who also saved money in retirement accounts will certainly have their Social Security benefits reduced, or taxed away. The retirement age will be raised, in a desperate attempt to extend the belief that meaningful benefits can be paid to those who “contributed” over their working lives — despite the current “payroll tax cut.”
We are not fooling anyone among the generation under 50. Of course they’ll be inclined to vote for politicians who give them a “payroll tax cut extension.” It’s paycheck money they can spend now — not unfunded promises for the future. That math is so simple that despite our educational system, today’s young people get it.
We are creating our own future Generation Warfare.
All the generous titles in the world, including the “Middle Class Tax Relief and Job Creation Act of 2012,” cannot hide the fact that our politicians on both sides of the aisle are spending our money to buy our votes — and destroying our future in the process. And that’s The Savage Truth!
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at
TerrySavage.com and blogs.