Ask The Advisor: July 2011

Ask The Advisor: July 2011

Q:  Why has the amount of Social Security payroll tax that’s withheld from earnings been reduced?  If Social Security is running a deficit, how will decreasing the amount being paid in help?  Won’t it just make it worse?  That’s just not logical.

A: There is nothing wrong with your math.  As Charles Dickens’ expert on insolvency,
Mr. Micawber, said in David Copperfield, on the subject of debt: “Annual income twenty pounds, annual expenditure nineteen and six, result happiness.  Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

 U.S. workers received a 2% payroll tax cut this year as part of a package of tax cuts and unemployment benefits that Congress passed last December.  The payroll tax break comes to a maximum of $2,136 per worker based on wages up to the maximum that is subject to the payroll tax of $106,800.  For example, workers making $50,000 in wages will get a $1,000 tax cut in 2011.

The White House, Congressional Budget Office, and many business groups say the payroll tax cut is an efficient way of putting more cash into the economy.  The idea is to boost jobs and the payroll taxes they produce.  But the tax cut comes at the same time Social Security is paying out more in benefits than revenues coming into the program.

 According to Social Security’s chief actuary, Stephen Goss, the system’s financial status will be “unaffected.”  But that’s based on a promise that every dollar, an estimated $112 billion, would be borrowed and paid into Social Security from the government’s general fund and credited to workers getting the break in 2011.

The Social Security Trust Fund has accumulated $2.5 trillion since the 1980s, but the government has borrowed that money, using it for other spending.  Instead, the Trust Fund holds special, non-marketable bonds representing I.O.U.s from the Treasury.  Although Congress has turned to short-term borrowing in the past to cover Social Security shortfalls, there’s no historical precedent for financing Social Security benefits from large infusions of funds from the general budget, especially when that money would have to be borrowed.

TSCL is concerned that Congress, under intense pressure to reduce the federal budget deficit and government spending, may turn to cuts in cost-of-living adjustments (COLAs), and other reductions in Social Security benefits to save money.  “Congress enacted the payroll tax cut without a clear plan for repaying Social Security,” says TSCL’s Executive Director Shannon Benton.

Sources:  “Social Security Payroll Tax Is No Way To Give Workers A Break,” Michael Hiltzik, Los Angeles Times, December 14, 2010.  “Payroll Tax Cut Worries Social Security Advocates,” Stephen Ohlemacher, Associated Press, December 12, 2010.