Paying for the "payroll tax" cut

[Midpack]

We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.

There are a lot of misconceptions on Social Security so I'm surprised there isn't a sticky/FAQ (unless I missed it) on this topic at an ER forum, though probably no one wants to be responsible for the content...

 

[donheff]

Sure Scrabbler, you are correct in a technical sense. But the SS Trust Fund is and was a good faith promise from the US Government (yeah, I know, another oxymoron) to the wage earners who paid into it that the funds they contributed would be held "in trust" for their retirements. I don't believe that means no changes should be made in payout rates, inflation factors, etc -- the fund is insufficient to pay the benefits as currently structured so changes need to be made. But I strongly believe that the taxpayers who paid into it have a fair expectation that the money "booked" for SS will be made available for retirement purposes. If not, we will have enabled a massive retro-active regressive income tax. That is the travesty that those who counsel treating the Trust Fund as a fiction would impose on us.

 

[Mulligan]

I'm not anxious to pay taxes in general but this is one tax I think I should be paying. I think SS should remain vital for the long term. Also, when they reduce FICA and replace the funding out of general revenues it makes it seem more like a welfare program.

I'm also amazed at the replacement funding - heard on the news that an affected mortgage holder would pay an additional $4,000 on a 25-year $250K mortgage - maybe someone can do the math to confirm. Doesn't seem to be a bargain to me when what we're getting is two months of FICA tax relief.

It does seem a very odd way to pay for it. As far as the tax cut in and of itself. At least it is a surgical strike that helps workers especially the lower, working, and middle class. As far as an additional year really helping, that will probably be more doubtful. In a year when it reverts back, it will be called a " tax increase" instead of ending a temporary cut that was the original purpose. Then the political football games will begin on who is blamed for increasing taxes.

 

[frayne]

We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.

In essence, same pair of pants, different pockets, and the SSTF pocket is stuffed full of worthless IOUs.

 

[ziggy29]

I'm not anxious to pay taxes in general but this is one tax I think I should be paying. I think SS should remain vital for the long term. Also, when they reduce FICA and replace the funding out of general revenues it makes it seem more like a welfare program.

Maybe, maybe not -- but levying a tax for 10 years to pay for a tax cut lasting 2 months?

 

[scrabbler1]

All the cashless SSTF represents is a claim on future general tax revenues (or funds borrowed from outside the government). When the SSA runs a cash shortfall (payouts exceed FICA tax revenues), it redeems some of those IOUs to the US Treasury so they can pay out all the benefits due.

When the so-called bonds in the SSTF are exhausted in 25 or 30 years from now, the FICA taxes collected will be able to meet about 75% of promised benefits. At that time, everyone will see a 25% across-the-board cut in benefits. Or, Congress and the president at that time will be faced with the exact same set of choices they would have if the SSTF still held its so-called bonds. That is, raise FICA taxes, raise non-FICA taxes, cut benefits, cut other government spending, or borrow the money from outside the government (i.e. public debt).

 

[pb4uski]

Even though the tax cut approved Friday extends for only two months, a small fee on loan amounts will be levied for a decade on all mortgages sold to housing finance giants Fannie Mae and Freddie Mac, which control about 60 percent of the nation’s mortgage market.

That's DC logic for you: 2 months of benefits to one set of constituents in exchange for 10 years of charges to a different set of constituents. What a bunch of dweebs. Perhaps the constituents are the idiots they apparently think we are.

 

[clifp]

You don't give that bunch in DC enough credit. They are much more creative than a mere 12 months:
Mortgage fees paying for tax cut - Spokesman Mobile - Dec. 24, 2011

A mere decade for two months of lower payroll taxes seems like a bargain.
I guess we can look forward to 60 years of higher Fannie/Freddie fee for the entire year worth of taxes cuts.

Considering the money Fannie/Freddie are hemorrhaging wouldn't have made more sense to use the fee to reduce the $10 billion worth of losses they suffered last quarter. Or would that be too sensible for Congress.

 

[Animorph]

Maybe, maybe not -- but levying a tax for 10 years to pay for a tax cut lasting 2 months?

It is intended to provide a current economic stimulus without killing the economy in the near future with higher taxes. So a short tax break with a long payback period fits the bill. What was kind of strange was proposing to pay for it immediately with a tax-the-rich scheme. No stimulus in that that I could see. The whole idea of stimulus is to provide extra cash now without paying for it now.

 

[ziggy29]

That's DC logic for you: 2 months of benefits to one set of constituents in exchange for 10 years of charges to a different set of constituents. What a bunch of dweebs. Perhaps the constituents are the idiots they apparently think we are.

Yep, this is another example of robbing Peter to pay Paul, because they lack the courage to tell everyone they have to pay for what they want. Everyone wants their own goodies preserved -- and they want everyone else to pay for it. And we wonder why Washington is broken...

 

[Brett_Cameron]

Here is the official summary report on Social Security income, trust fund status and projections: Trustees Report Summary .

This includes a discussion of revenues and expenditures and how the trust funds are treated.
This indicates, from a government accounting standpoint, that the "ious" in the trust fund are actually treated as interest generating items and that the "interest", paid from general revenues is now supplementing payroll tax revenues and will until 2022, as projected. After 2022, the "ious" themselves will be redeemed until they are exhausted in 2038.

Regardless, the payroll tax revenue is less than current payouts.

 

[samclem]

It is intended to provide a current economic stimulus without killing the economy in the near future with higher taxes.

If we want to stimulate business, hiring, and the economy, the way to do it is with tax rates and policies that are relatively constant and predictable. A lot of the cash sitting on the sidelines now is there due to the recent flood of "good ideas" and changes that make the future costs of hiring employees, borrowing capital, and investing in new plant/equipment much more variable than just a short time ago. Extensions of stimulii for 60 days at a time just shows the buffoonery of the present gaggle of folks in DC.

 

[ziggy29]

If we want to stimulate business, hiring, and the economy, the way to do it is with tax rates and policies that are relatively constant and predictable. A lot of the cash sitting on the sidelines now is there due to the recent flood of "good ideas" and changes that make the future costs of hiring employees, borrowing capital, and investing in new plant/equipment much more variable than just a short time ago. Extensions of stimulii for 60 days at a time just shows the buffoonery of the present gaggle of folks in DC.

I tend to agree. Nothing hurts the markets and the economy like uncertainty. And doing nothing but passing laws, having the opposition immediately seek to repeal them, and kicking the can down the road instead of making tough, lasting decisions adds immensely to insecurity.

When you don't know if an investment that makes sense today will be good in a year from now because of a high potential for changes to tax and regulatory policy, you're more likely to not invest it. And the economy and the markets suffer for it.

I've long said that the level of tax rates (within reason) are less important to economic growth than the constant yo-yoing, the constant tug of war, between warring factions constantly trying to change them. Whether lower or higher, I think we'd be well served to lock in tax policies for a long time, stop kicking the can down the road with "emergency stopgap" extensions and stop tweaking them every year.

 

[pb4uski]

Spot on ziggy. Our elected public servants overwhelming interest in getting reelected rather than making our country better is depressing. Perhaps a revolution is in order.

 

[Midpack]

Yep, this is another example of robbing Peter to pay Paul, because they lack the courage to tell everyone they have to pay for what they want. Everyone wants their own goodies preserved -- and they want everyone else to pay for it. And we wonder why Washington is broken...

Agreed, but how's this reconcile?

You've already acknowledged this here and in other posts, but if any of them did have the "courage" to tell us what we need to be told, they couldn't get elected - something they well know. Aside from the gamesmanship, the electorate is just as much to blame as the politicians. Add in campaign finance and the influence that buys, and it's no wonder we are stuck.

I've read several moderate thinkers who say we're going to need some sort of crash or upheaval to change course, I am starting to think they may be right. It's hard to believe we'll come to our senses without some sort of shock to the system - that's sad. And the irony is many people (one recent poll reported 75%) seem to recognize what needs to be done (higher taxes for all, tax code reform to simplify and reduce loopholes for indiv & Corps, lower government spending for all major expenses, campaign finance reform to name a few), but there's no one effectively pushing for any middle ground. The only "revolutions" so far seem to be well right or well left of the mainstream, adding to polarization or protecting respective turf...

 

[pete82]

I don't think that anyone earning $106,800 to $150,000 would be upset, particularly if they know that their SS will be more secure as a result.

High earners are not nearly as concerned with SS being secure as those at the lower end of the earning spectrum. Someone earning $150k for a decade is likely to have $1,000,000 saved by retirement thus relying far less on SS than someone with only $20k saved at age 65.

 

[pb4uski]

High earners are not nearly as concerned with SS being secure as those at the lower end of the earning spectrum. Someone earning $150k for a decade is likely to have $1,000,000 saved by retirement thus relying far less on SS than someone with only $20k saved at age 65.

I agree that high earners are less concerned with SS being secure for themselves but the security of SS has wider implications than just themselves. There are many high income earners who have less than $1m savings because their lifestyles are commensurate with their means.

 

[meierlde]

Ok just to do the math on a 250k mortgage, .1% is 250 a year, for 25 years that works out to 6250, but that is before the tax deduction. However until mortgage rates go up from their terribly low levels its not much of an issue, as the total interest will be on the order of 145k (5% at todays low levels of interest). Let the rates go back to 6%and the total interest is 233k and at 10% its 431k. So if interest rates go back up the impact on the total payments is reduced.

 

[Payin-the-Toll]

Where's Al Gore with his 'lock-box' when we need him?

 

[Independent]

There are a lot of misconceptions on Social Security so I'm surprised there isn't a sticky/FAQ (unless I missed it) on this topic at an ER forum, though probably no one wants to be responsible for the content...

Here's my candidate for the SS Trust Fund Sticky FAQ:

First: The blind men who described an elephant all had different stories, depending on which part they felt. One said it was like a snake, another a rope, another a tree, another a wall. Describing the SS trust fund depends on your perspective.

Accounting: The TF is just a spreadsheet that records each period's revenue and expenditures and accumulates the difference with interest.

Political Agreement: The TF keeps track of a compromise between people who wanted a bigger SS program and people who wanted a smaller program. They agreed that SS benefits would be fully funded by a dedicated tax, and that tax would not be used for anything else. The accounting worksheet tells us whether we're slipping off that agreement, and by how much.

Tax Burden: Since the SS tax is a regressive tax on labor income, while the FIT is a progressive tax on labor and capital income, different people are more impacted by one or the other. When the worksheet shows that SS is out of balance, we know that the groups are bearing more or less of the total burden of government than agreed.

Legal: Under current law, the Treasury Secretary is both allowed and obligated to pay SS benefits as long as the worksheet shows a positive balance. When the balance gets too close to zero, s/he will have to defer benefits until tax revenue refills the bucket enough to send the next batch of checks, and then s/he will send them.

Political Decisions: Because of the Legal above, gridlock in Congress means that SS benefits will be paid in full as scheduled until the worksheet gets too small. Then they will be paid at a reduced annual rate. Changing laws requires two houses of Congress plus the Prez, and they seem to be pretty polarized. Therefore the "full benefits till the big step down" scenario could actually occur.

Macro-economic: The federal gov't impact on the macro-economy depends only on total spending and total taxes. Any internal government accounting is irrelevant.

My Taxes: It depends on my personal tax situation. Is the SS tax a bigger deal to me than the FIT? or is FIT bigger? or are they about the same? In the third case, I really don't care where they get the money for SS. If one is noticeably bigger than the other, then how Congress deals with the TF imbalance can impact my tax bill.

 

[FreeAtLast]

Last year when the payroll tax cut started my employer started requiring the employees to contribute to the health insurance benefits plan. Our net pay stayed almost the same.

In this case the payroll tax cut just went to fund the increase cost of health insurance that was passed on to us as a payroll deduction.

 

[cashbalancetrouble]

Payroll tax not for everyone

Just to clarify, the new tax cut is for those not making above the SS max. If you earn over $110,000, the bill had a new tax on the wealthy sneak thru.

The new bill extending the social security payroll tax cut for two months includes a recapture tax for those who make above the taxable wage base prorated for the two-month period.


The Internal Revenue Service said the “recapture” provision applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

 

[robjr100]

I think they want to remove the fact that Social Security funds itself.It will make it easier to slash benefits that way.

They also want to get around the 4 or 5 trillion dollar surplus that has vanished and turned into IOUs.

Something else that get`s my goat is how they call it a "payroll tax cut" when it should be called a Social Security tax cut.Many people just listen to the sound bites on the news and are led to believe this is a federal income tax cut.

Nothing like putting lipstick on a pig.

 

[Chuckanut]

I actually like the simplicity of the [-]social security[/-], I mean payroll tax. We have a program to provide some income help to older people. We pay for it through this tax. It applies to all Americans and people working legally in the countery. Very nice. SS funds should not be part of the Unified Budget as they are now. This has corrupted the system.

I wish we would do medical care the same way. This is the medical care we are providing to all citizens and legal aliens. This is the tax that is going to pay for it. We would all know what we are getting for our money and can make a rational decision on it. Again, the $$'s would not be part of the Unified Budget and spent on other things.

 

[tightasadrum]

I actually like the simplicity of the [-]social security[/-], I mean payroll tax. We have a program to provide some income help to older people. We pay for it through this tax. It applies to all Americans and people working legally in the countery. Very nice. SS funds should not be part of the Unified Budget as they are now. This has corrupted the system.

I wish we would do medical care the same way. This is the medical care we are providing to all citizens and legal aliens. This is the tax that is going to pay for it. We would all know what we are getting for our money and can make a rational decision on it. Again, the $$'s would not be part of the Unified Budget and spent on other things.

This makes a lot of since to me for its intended purpose: providing a safe minimum of survival and care in a civilized society. My concern has to do with how it is manipulated by those who can earn money by gaming the system. Does the basic level of support and care become the new zero basis, which allows insurers and everyone else to make that the new zero basis for costs? Then it's simply a step up in costs, i.e. inflation. Insurance companies make money on these spreads.