Social Security payroll tax

News reports say it is likely the 2% tax reduction on Social Security payroll taxes is likely to go away in 2013 . . . and the angst begins.

When the government tried lump sum stimulus payments much of the money was saved rather than spent. Instead, brilliant minds said if we give them a little at a time most people won’t notice it, won’t save it and hence it will be spent. In fact, it was spent so efficiently it has become what some are calling a necessity to pay for essential expenses like food for some households.

This slight of hand cost the government $200 billion over the last two years; money that was borrowed to replace money that was diverted from the Social Security Trust.

Two years ago Americans paid this tax and lived on their net income, now they will be asked to do so again. We are back to where we started only now some can no longer live on their net income because they have come to rely on that extra $19.23 (on average) a week. What a cruel hoax by politicians.

Americans could have avoided the stress of the tax going away by better planning. Isolate that money and use it not for recurring expenses, but for one time essentials or for emergency bills over the last two years, (or heaven forbid, save it) but you see the hoax of burying it in the net pay was hardly noticed at all.

This reminds me of the time I was explaining health insurance payroll deductions to a group of employees in a company we had acquired. When I told them the amount of the deduction there was a near riot. We don’t pay anything now, our coverage is free they shouted. At that point the owner of the company intervened and said, “Hey guys, the deduction this guy is telling you about is $20 less than what you are paying now” … not a clue.

If Americans can’t afford the 2% payroll tax, how can we afford Social Security? Indeed, how can we afford any of the promises made by our politicians? If property taxes are a burden as they are in many states, how can we afford pensions and other benefits for public employees that are far more generous than what average Americans receive? If average Americans are struggling to get buy, if sixteen million Americans are underfed how can we afford to send millions to fund projects in other countries albeit a small portion of the federal budget?

What we fail to realize and what politicians like to ignore is that sooner or later, one way or the other everything has to be paid for by all Americans, not just the wealthy, not just the millionaires and billionaires.

The fact is that entire Social Security payroll tax is insufficient to fund the promises of Social Security. From the Trustees report:

For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period, lawmakers could: (1) increase the combined pay- roll tax rate for the period in a manner equivalent to an immediate and permanent increase of 2.61 percentage points (from its current level of 12.40 percent to 15.01 percent)

The so-called tax holiday should never have happened in my view. The short-term benefit did not outweigh the longer term consequences as we are about to realize.

Our fundamental problem is that as individuals and as a nation we seem incapable of strategic thinking and long-term planning or of anticipating the consequences of our short-term actions often because the truth hurts (and doesn’t get politicians elected).