The US House of Representatives passed on Tuesday (December 13, 2011) a bill that had in it a key Social Security tax component that Obama favors: it would keep 160 million workers from seeing their payroll tax go up on January 1, 2012, from this year’s 4.2% back to 6.2%. The bill ignores Democrat proposals to place a surtax on people earning more than $1 million annually to offset the payroll tax non-increase. BTW, because the bill also has a clause in it about the Keystone XL pipeline, Senate majority leader Harry Reid (D-NV) said, “It was dead before it got to the Senate. The Senate will not pass it.”
So, with that as a background, let’s look at the affect that this bill (and Obama policy) could have upon Social Security.
A Social Security trustee, Charles P. Blahous III, a member of the board of trustees for Social Security and Medicare, says that extending the cut in the Social Security tax could make the program more dependent on income tax revenue in the future, thus leaving it with less political protection than it has now. Replacing Federal Insurance Contributions Act (FICA) with income tax revenue would change Social Security, making it more like other entitlement programs that are subject to political whims and budget priorities. Said Blahous, “It’s really basically a conversion of the system from payroll-tax financing to partial income-tax financing.”
Obama and Democrats want to extend the 2% FICA reduction for another year. But doing so would reduce funding for Social Security by $119 billion over the next year on top of the $105 billion in reduced funding this year. Democrats propose to offset the 2012 funding shortfall by raising taxes on people making over $1 million per year.
When President Franklin D. Roosevelt established Social Security, he designed it to be funded separately from the general tax fund, a “trust fund.” He was quoted as saying, “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. Those taxes aren’t a matter of economics, they’re straight politics.” Wanna bet? Politicians (of both parties) raided the Social Security trust fund for years. That it now contains $2.68 trillion is a myth. The board of trustees for Social Security and Medicare issued a report in August, 2011, saying that Social Security ran a deficit in 2010 for the first time since 1983. The deficit for 2010 was $49 billion, and the deficit for 2011 is projected to be $46 billion.
Cross-Posted at RWNO, my personal web site