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Wednesday, December 8, 2010

Obama Opens The Door To Raid Social Security

One of the interesting aspects of the "framework" announced by Obama to prevent marginal income tax increases on anyone is that part of the quid pro quo demanded by Obama was a one-year 2% drop in the portion of social security (FICA) taxes paid by employees (the portion paid by employers remains the same).

Prior to the 2008 election I noted that Obama's proposal at the time to issue "refund" checks to people who pay no income taxes as a rebate of FICA payments amounted to a double-dipping, since wage earners would get a refund of their FICA payments but still would receive the benefits.  I noted again after the election:
Equally important, Obama's plan changes the very nature of social security. No longer will social security be a system in which workers contribute now in order to "get back" the contributions at retirement. For a large percentage of the population, there will be no real contribution to the social security system; those contributions will have been "refunded" through "income tax credits" long ago.
The "tax deal" follows through, in a very limited and temporary way, on Obama's goal of FICA rebates to wage earners without a corresponding change in benefits.

We have maintained the myth for several decades that FICA payments actually exist in a social security trust fund.  I say this is a myth because in fact the money is lent to the government for general budget purposes and in return the trust fund receives promises to repay the loans.  At the end of the day, the social security trust fund is only as good as the government's general ability to pay, which is endless because the government always can print more money.  The result of printing more money out of necessity would be inflation.

The current tax holiday for a portion of employee FICA payments is another step in divorcing employee payments from employee benefits.  Employee payments into the system will be reduced, but benefits will not be reduced as a result.

Richard Eskow of the left-wing Campaign for America's Future, writing at HuffPo, picks up on this point, Obama's "Tax Holiday": A Poison Pill for Social Security, but few others in the Democratic base have noticed.  Perhaps they are still reeling from the beating over the head Obama delivered at his press conference yesterday.

FICA increasingly is being treated as just another tax, and social security benefits as just another government entitlement, to be toyed with as political necessity requires.

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  1. Young people are starting to wake up. The ones I chatted with in DC who were working the Stewart-Colbert rally are very concerned -- and realize that they are the ones who are going to be on the hook for all the items on the Progressive wish list -- which will necessitate subverting their own personal needs and goals for the good of the "collective".

    Prof Dowd gave a speech which echoes what I have been telling young people for quite some time: you have the right to repudiate the ever increasing and apparently insatiable demands of the state on your labor. Just say "no". I'll be posting a bit more about that idea later, but here is a tidbit from Prof Dowd's talk (posted at Mises.org) :

    "The Current Financial Crisis - and After"

    "You can play by the rules your elders would impose on you. You can expect to pay higher and higher taxes, work harder and harder to stand still, and get less and less back in return for yourselves — a life little different from slavery — and then the system will collapse anyway.

    Or, alternatively, you can fight back. There is no law of nature that says you have to honor checks that other people write at your expense. You are not slaves — you are slaves only if you choose to submit to slavery. You can repudiate those checks."


    Sorry for the long reply -- didn't mean to hijack your thread -- just thought it was timely and apropos.

  2. I was shocked when I learned how much McConnell negotiated away to preserve the current tax rates for the top 2%. Conservatives ought to be throwing up on their shoes with the deal he negotiated. Finally, Jim DeMint says he's opposed to it. So is Club for Growth and Heritage.

    We can get a MUCH better deal that doesn't blow up the deficit next year with the new Congress.

  3. The worst effect of the top rate increase would be because of small businesses whose owners report the business on their personal income tax forms. If the increase were somehow limited to those making over 250K in wages payed by someone else it would be a lot less deleterious.

    Historically, the income tax never gets the government more than 19% of GDP, no matter what the top rates are. The Progressives are delusional in thinking a tax hike, under current circumstances, will net anymore revenue to be spent on their programs.

    We have a spending problem, and next year the knives have to come out.

  4. this is a deal on taxes ... get it, TAXES not spending ... the deficit is a result of out of control spending ...
    since next years deficit is still projected to be at least a trillion the 70 billion of higher income tax cuts is hardly blowing up the deficit ... now if you include the rest of the cuts it still doesn't blow up the real deficit ...
    Next year they'll get to attack spending ... with a 2 year safe zone of no new taxes ...

  5. Republicans aren't intelligent enough to understand how they just got rolled. It's really quite funny, actually, watching them celebrate this hollow victory.

    Obama has really trapped them good if they pass this thing. Imagine two years from now ... are Republicans really going to argue that these Social Security taxes should be raised back up?

    Here's what Democrats want: They want businesses to be on the hook for ALL Social Security tax increases. So that these taxes can be raised surreptitiously. See ... if business is the only one paying, and they're offsetting the costs through higher prices and lower wages, then nobody notices so much that their Social Security premium just went through the frigging roof.

    The only way for Democrats to get businesses to "hide" the cost of Social Security is to get business paying the entire cost. Thus, this FICA "holiday."

    This FICA holiday will be forever, and is merely the first one. The tax will eventually be reduced to 0% for the employee and 100% for the employer.

    Then FICA taxes will be dramatically raised on employers, since businesses can't "vote the bums out."

    Republicans are morons if they take this deal and the Tea Party candidates should prevent the deal from occurring.

  6. Obama is the first lefty to essentially say there is no "lock box" unlike Al Gore's lies...

  7. Actually FICA is just another tax. The government must instantly return to the economy every penny it takes in, lest the money supply fall, FICA included.

    That means it has to spend it just like general revenue, right away.

    It therefore offsets government borrowing, just like general revenue.

    The bookkeeping difference is that a IOU representing that borrowing winds up in the hands of SS instead of China.

    As a tax, it's one of our best taxes, a flat tax. It would be even better if the upper limit were raised, and it was extended to more kinds of income, and the income tax were reduced or abolished in compensation.

    A flat tax makes wise voters.

  8. I think SS should be changed to pay-as-you-go. Each year the level of taxes and benefits could be set so that there is neither a surplus nor deficit. Then people will see in their paychecks what the real cost is and we can get rid of this fiction of a Trust Fund.

  9. rhhardin: it is not a flat tax, it is one step above a poll tax or head tax: It taxes the first dollar you make and stops at about $40,000 or so. It is deeply regressive.

    It is also a lie, as others pointed out, because the employer side is a hidden tax. But there are a lot of those; Michigan has an employment tax which is a poll tax for every employee. Better to push for a law forcing employers to publish those taxes on the check stub, and to outlaw state and municipal interference.

  10. Prof. Jacobsen,

    "Raid" social security? The money is already spent. The "trust fund" consists of "I'll pay myself back with borrowed money later." The program has now become a net negative on the current accounts budget -- it pays out more than comes in.

    So I ask you, since SS has neither actual assets nor a positive cash flow, what is there for Obama or anyone else to "raid?"

    SS is most certainly "just another entitlement, to be toyed with as political necessity requires." Always has been. It's just that up until now, the "toying" has consisted of spending the "trust fund" and using the money to reduce the size of current deficits.

    Now that there's no more revenue to steal (SS isn't positive cash flow any more), the toying will just take other forms.

  11. I just got done listening on CBS radio to David [?] Ross explain how cleverly Obama has trapped the Republicans and the Tea Party [which soon disappear no matter how the compromise works out -- it's that powerful] with his brilliance. All I could think of was The Princess Bride:

    Westley: "Truly, you have a dizzying intellect."
    Vizzini [Obama]: "Wait 'til I get going!"

  12. The supreme court has already decided 40 years ago that social security is just a tax. You have to pay in, but don't have a right to get anything out of it.

    The so-called trust fund has been raided. The only way to redeem the $$ from the IOU's is naked printing. You think the Chinese will buy those treasuries?

  13. @JorgXMcKie:
    The next time you are going to assert evidence of Obama's putative "brilliance", please provide a link.

    Absolutely nothing I have heard ... even on CBS ..supports your claim.

    If you are referring to David Mark's recent commentary on Washington Unplugged, then all I have to say is .....

    You really, really, REALLY don't understand the Tea Party.

  14. Y, the SS "lock box" was and is another cynical fraud perpetrated by the lying crooks we call "leaders". Many recognized back in the 90s that the money SS was "lending" to the Treasury would not be paid back; the math was just not there regardless of what the blowhards in DC said. The fiscal psychosis of a program pretending to be both insurance and welfare was bound to rip SS apart sooner or later anyway. Now that Obama is letting some more of the cat out of the bag, maybe it's time to make a clean break and declare an end to the whole charade. Terminate the stupid program. Those who have "contributed" over the years will be paid off on a sliding scale based on how much they put in and whether they need the money or not. Anybody over the retirement age who needs more financial help will be eligible for a new aid program paid for out of the general fund. SS "contributions" will no longer be extorted from the general public. The "lock box", "contract between the generations" and the rest of the SS BS mumbo-jumbo will follow their private-sector predecessors into Ponzi-scheme hell. Good riddance.

  15. Better to push for a law forcing employers to publish those taxes on the check stub...-pbuxton

    That idea has been screamingly obvious to me for decades. But what's the point of passing a law demanding that employers be smart?

  16. If SS is not modified in some way, the government debt, or taxes, will skyrocket. The Supreme Court ruled at the time SS was passed that it was just a tax.

    So long as the tax shows up on pay stubs people will think they are entitled to get back the money that they paid in. I propose eliminating ALL FICA taxes and pay SS checks out of general revenues. Then people can see that SS is just another form of welfare.

    P.S.-Just don't reduce my SS check--after all, I paid in for YEARS. ;-)

  17. I am happy to see you expose the myth of the SS trust fund. However, it is disappointing to see you propogate the myth of SS being an employee benefit. The government takes from whom it choses to take and gives to whom it choses to give.

    Your comment, "FICA increasingly is being treated as just another tax, and social security benefits as just another government entitlement, to be toyed with as political necessity requires." is accurate. It also describes what FICA and SS have always been. Our rulers are merely dropping the pretense and exposing the myth.