The Jobs Bill: Pretending to Fund Social Security

September 29, 2011

The president's latest "jobs" proposal would extend and deepen cuts in the Social Security payroll tax.  Before this legislation is seriously considered, there needs to be greater understanding that it 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, says Charles Blahous, a research fellow at the Hoover Institution.

While the Social Security system as a whole stands on financially shaky grounds, recent policy decisions greatly increase the danger of eventual collapse:

  • In 2011, Social Security, while technically "solvent," will run a $150 billion deficit of tax income relative to costs.
  • This deficit swells the $2.6 trillion of debt that is already in the program's trust funds.
  • The payroll tax cut enacted last December was accompanied by a provision to funnel roughly $105 billion in general revenues into the Social Security Trust Funds, and this year's "American Jobs Act" aims to cut payroll taxes by a further $240 billion in the next year alone.

The policy decisions of the Obama administration in this regard signal a gradual transformation for Social Security funding: cuts to the payroll tax will simply be offset and made up for by transfers from general revenues.  There is no discussion of how to cut spending or reform the program, but policymakers instead focus on how to shift funds to keep the system afloat in the short run.

These policy decisions should outrage voters on each side of the aisle.

  • First, they endanger the ability of Social Security to remain solvent without a dedicated and reliable source of revenue.
  • Second, the decision to reallocate funds from general revenues (largely income taxes) to Social Security in order to allow for payroll tax cuts creates yet another burden for income taxes to bear.

Long-term focus on these implications is necessary to evaluate changes to an institution as far-reaching as Social Security.

Source: Charles Blahous, "The Jobs Bill: Pretending to Fund Social Security," Economic Policies for the 21st Century, September 19, 2011.

For text:

http://www.economics21.org/commentary/jobs-bill-pretending-fund-social-security

 

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