Extend the Payroll Tax Cut Holiday… into 2012?

President Obama

Under reported from his news conference yesterday, President Obama floating the idea of extending the payroll tax cut holiday another year as part of a deal to raise the debt ceiling limit.

After August 2nd the U.S. government will start defaulting on its enormous debts.

Instead, media coverage focused on President Obama’s suggestion that tax hikes must be a part of any debt discussion, his denial he violated the war powers act and what his personal view of gay marriage might be.

Debt Discussions and Gimmickry

This seemingly innocuous suggestion for a tax holiday extension, made to sound like a Democratic job-creating tax cut concession to Republicans, is yet another gimmick by politicians to get reelected.

The most insidious part of this suggestion is that it will weaken Social Security, yet get bipartisan support.

In a presidential election year, 2012, it would not be good elective policy to have millions of working voters return to a higher payroll tax deduction and less take home pay. That sounds like a tax increase to them.

If this year’s payroll tax holiday is not extended then the average working voter in 2012 will feel like they’ve got a $1,000 tax increase.

Instead, politicians will brag about extending the tax holiday to help boost economic activity and create jobs. No working voter will disagree with having more take-home pay that helps create jobs.

In truth, however, all politicians are doing is further risking the precarious fiscal solvency of Social Security for a short term political gain.

To understand why it is not a good idea to extend the ‘holiday’ we have to understand what the payroll tax is, what a tax holiday is and how it all fits together.

What is the Payroll Tax?

Its a deduction in your take home pay seen on every paycheck you ever get. It is listed in the little box titled FICA.

FICA stands for Federal Insurance Contributions Act. It came about as part of the creation of Social Security back in 1935. That deduction was originally earmarked to be put in the Social Security Trust Fund to pay for old-age, survivors and disability insurance (OASDI).

In the 1960s when Medicare was created the FICA deduction was modified to include an additional payment into the Medicare Trust Fund. Its been modified to add other things since as well.

Both employers and employees pay into FICA. Today that amounts to about 15.3% of your gross pay. 7.65% is your employer’s contribution. 7.65% is your portion. That is what gets listed in the FICA box. Of your 7.65% contribution, 6.2% is for Social Security and 1.45% is for Medicare.

Your yearly contribution to Social Security has a top end cap. Medicare does not. Any income above about $106,800/yr is not subject to any more Social Security deductions.

When a Tax Isn’t a Tax

FICA really isn’t a tax in the traditional sense of the word.

A payroll deduction into a 401k plan, for example, is not a tax. Its a personal contribution you make into a savings plan for your future retirement. So is FICA. Its not only a contribution to a savings plan for your future retirement but also helps pay for future medical needs after you retire.

That can hardly be considered a tax like paying for defense, national parks or the EPA. Those things are paid for through income taxes.

The only difference between a 401k plan and FICA is that one is privately held for you, usually through your employer, and the other is entrusted to the government to hold for you until you need it at retirement.

What is a Payroll Tax Holiday?

Part of the Bush-Era tax cut extension deal made last December during the lame duck Congress included a new one-year FICA reduction of employee Social Security contributions from 6.2% percent to 4.2%. Employers still pay their 6.2% share.

In that deal employees saw a 2% increase in their take home pay this year, just like getting a raise, up to a maximum of $2,136 for those making $106,800 or more.

The average worker will see an increase in take-home pay of about $1,000.

The government allowed you to take a 1-year break from paying the full amount of your Social Security contribution.

That is what is meant by a payroll tax “holiday”.

So What’s the Down Side?

Before reading further, if you still have a job, why don’t you dig out one of your paycheck stubs and look a the FICA box while you read on.

We, and the government, would never tolerate allowing a private financial institution managing our 401k plan to simply dip into our money under the promise to put it all back later. Bernie Madoff went to jail for that.

Then, after having done that, have that same financial institution tell you that you can temporarily reduce your 401k plan contribution but will still get the full return on your investment as if you’d paid in the whole amount.

That is a false promise. That is even more than Madoff promised. Yet that is exactly what the federal government is promising.

All excess Social Security collections you’ve contributed through FICA has long since been borrowed and spent by big government for other programs.

Today, it survives only on the current yearly payments made by employed workers.

The Politics of Retirement

Now the President suggests extending the payroll tax “holiday” through the 2012 election year. Cool. Now you, the voter, might have more money in your pocket in an election year.

Having more money in our pockets makes us happy voters who have a tendency to vote for the politicians who made us happy. That will be both Democrat and Republican incumbents… and the President, of course, who is the first politician to push the idea publicly.

Make no never-mind that we are allowing politicians to further destabilize the fiscal solvency of Social Security, our national retirement system, by reducing its collections.

The government pays interest on the money it borrowed from the trust and dutifully reports how much is made each year. However, since the money is borrowed by government both principle and interest are simply tacked onto the national debt in a category called “Intragovernmental Holdings”.

How are Social Security Recipients Being Paid?

Simple, the current year’s FICA collections are used to pay Social Security checks. It is a pay-as-you-go (PAYGO) system. It has been since its inception.

That works as long as FICA yearly collections exceed Social Security’s yearly outlays.

It is NOT true, as you hear from government officials, that there is enough money in the trust fund to last until 2037 before it runs out. The fund is empty now. All that exists are paper T-bills the government bought from itself. The excess cash from your paychecks was spent for other purposes!

It makes logical sense during our down economy to give Social Security recipients a cost of living (COLA) increase as economic “stimulus”, too, just like unemployment has been dubbed as “stimulus”. But for the first time in history, Social Security recipients have not got a cost of living increase at all and its happened now two years in a row.

Now the Really Bad News

Last year, for the first time in history, Social Security took in less in real revenues than it paid out in benefits to the tune of about $37 billion. However, Social Security’s balance sheet still looks positive because the interest earned from the money borrowed by the government made up the difference.

But that interest actually went back into the purchase of more T-bills, not into an actual monied account.

So where did the real money come from to pay for the real $37 billion difference between Social Security receipts and outlays.

Answer: Government simply tacked it onto the national debt!

This year, with the 2011 payroll tax holiday, voters will be happier but Social Security revenues will plunge by an additional $120 billion.

Where will the additional $120 billion come from to pay Social Security checks this year?

Answer: Yup, without a thought, Government will simply tack it onto the national debt!

And how do you suppose the 2012 election year payroll tax holiday extension will be paid for?

Conclusions

If given a choice, retirement spending would be the last thing on any voter’s wish list of taxes to cut.

Government’s lack of good stewardship with the money we already gave it now seriously jeopardizes both the Social Security and Medicare Trust Funds that workers have contributed into for a lifetime.

Yet, our politicians are perfectly willing to keep piling onto the national debt willy-nilly if it will help them get reelected.

That is just one reason our national debt is now at $14.345 trillion and has grown by $3.72 trillion just since Obama assumed office.

Enough is enough! Its way past time for government to live within its means.

The economic solvency of the nation is at risk

—————————————————————————————————————————————————————

Addendum:

Other related Social Security/payroll tax holiday articles can be found here:

Payroll Tax Cut: Victory for Obama?
-Azleader, Inform The Pundits!, 12/27/2011

Payroll Tax Cut: How Many Jobs?
-Azleader, Inform The Pundits!, 12/21/2011

2-Month Payroll Tax Cut Extension – Huh? What??
-Azleader, Inform The Pundits!, 12/19/2011

2012 Payroll Tax Cut Holiday Extension – Democrats vs. Republicans
-Azleader, Inform The Pundits!, 12/15/2011

Payroll Taxes: Good News/Bad News
-Azleader, Inform The Pundits!, 12/9/2011

Payroll Taxes… Change of Venue
-Azleader, Inform The Pundits!, 11/22/2011

The Systemic Demise of Social Security
-Azleader, Inform The Pundits!, 11/15/2011

President Obama’s Jobs Proposals
-Azleader, Inform The Pundits!, 9/1/2011

Don’t Extend the Payroll Tax Holiday
-Azleader, Inform The Pundits!, 8/21/2011

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Jul 1, 2011, in 2012 Elections, Deficit, Economy, Obama, Payroll tax, Politics, Social Security, Taxes. Bookmark the permalink. 14 Comments.

  1. An excellent post, AZ. Those I.O.U.s the Treasury left in the trust fund might serve as wallpaper but not much else.

  2. I love it. This is the most Orwellian piece of cr*p I’ve ever seen! “Payroll tax is not a tax” is about as skewed as “War is Peace”. Claiming that the tax holiday jeopardizes fiscal stability without mentioning the Bush tax cuts is… well, “irresponsible” is the best word I can come up with.

  3. Kevin, perhaps you are a bit confused.

    Don’t get hung up on what is or is not a tax.

    In this article I’m only talking about Social Security and its funding source, payroll taxes, and how cutting payroll taxes more, as proposed by President Obama, negatively affects the fiscal stability of Social Security.

    Payroll taxes were not changed in the 2001/2003 Bush tax cuts. The Bush tax cuts, regardless what is done about them, are unrelated to Social Security. That is why they are not discussed here.

    According to the Annual Social Security Trustees Report on 5/13/2011, Social Security is no longer collecting enough revenues to pay for its outlays and, in its current form, will not be able to meet its obligations for at least the next 70 years:
    http://www.socialsecurity.gov/pressoffice/pr/trustee11-pr.htm

    That report is relevant.

    The most important question is this:
    Why are we proposing further funding cuts to Social Security – OUR retirement plan we’ve paid into all our lives – given that it can no longer support itself and won’t for many decades to come?

    If you want to cut taxes, like the President has proposed, perhaps cutting taxes from somewhere else – income taxes, for example – is a more logical choice.

  4. Ah, reminds me of the famous quote “Writing is an adventure. To begin with, it is a toy and an amusement. Then it becomes a mistress, then it becomes a master, then it becomes a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster and fling him to the public.” – Winston Churchill

  5. If I don’t know anything else, I know that, if the 3.1% payroll tax cut proposed by the Obama administration is not passed, i will cut my personal spending by 3.1% of $110,100 or $3,413 and put it into my IRA or otherwise invest it in a way that I still have it come Monday morning. There was never much future in spending money and now the only future is in saving it.

  6. If the payroll tax cut is not extended, I suggest you make the tax cut for yourself by cutting your needless and wasteful spending by the amount of the tax cut. The cut is 3.1% of your wages, up to $110,100. The tax cut could be $1,000, $1,500 all the way to $3,300. Here’s how to do it:

    1. Cut your cable subscription to “basic”. We did that a few years ago and have saved $900 per year.
    2. Cut your dining out and bar room tabs by going out less often and eating [and drinking, if needs be] at home. You will be shocked…shocked by how much you save. You could save the entire tax cut on this item alone.
    3. Stop buying all the junk you buy at malls. Consumer goods sold in this country have fallen terribly in quality and are for the most part cheap plastic junk made by child slave labor in third world countries.

    Who do you think owns the businesses that sell this junk to you? It is the 1% we keep hearing about. RICH PEOPLE DON’T BUY THINGS…THEY SELL THINGS…TO PEOPLE SUCH AS YOU. Your continuing to buy this junk is what keeps you in the 99%. You keep yourself poor.

    Put your savings into an IRA and resolve to keep doing this, year in, year out. How you do like being broke all the time? Being broke is not only embarrassing and inconvenient; it can be fatal.

    I’ve been an attorney dealing with trust and estate clients for over 30 years. I’ve seen the habits of wealthy people. I’ve seen how they’ve got and remain wealthy and I share some observations with you.

    Remember: A. Rich people don’t buy things, they sell things.
    B. There is no future whatever in spending money but there is a splendid one in saving and investing it.

    Good Luck.

  7. Ponsonby… thanks very much for sharing your knowledge and experience.

    You are 100% right about how to become rich.

    I also agree with you that we consumers, just like the federal government, overspend on items that we could easily do without. Your suggestions for dealing if the payroll tax holiday is not extended are viable.

    A caveat:
    In order for a person to sell something to become rich there has to be a consumer who buys it. You can’t sell anything if you have no customers.

    There are two sides to a healthy economy essential to growth: supply and demand.

    Those two thing must work together in lockstep for overall long-term economic prosperity.

    The problem right now is that they are out of whack with each other. There are not enough consumers to support the nation’s ability to produce goods and services.

    That is what causes recessions (and depressions). The solution is to somehow boost demand.

    Ironically, your suggestions to cut personal spending – though good – actually hurts the overall economy.

    Every time we buy something we help support not just the rich who own the business, but the paid workers who build the product or provide the service.

    When we cut personal spending we contribute to unemployment (ironical announced down today) because there isn’t enough demand to make enough money to pay the employee’s salaries.

    In your line of work you deal with people smart enough to plan for their financial futures. Unfortunate, most everyone else are not that smart. They expect something for nothing.

    And that is what has helped get us into the fix we are in today!

  1. Pingback: Don’t Extend the Payroll Tax Holiday « Inform The Pundits!

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