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Posted by on Mar 23, 2010 in At TMV | 9 comments

Save Social Security — Eliminate The Payroll Tax And The Social Security Trust

A recent AP headline read: “Social Security to start cashing Uncle Sam’s IOUs.” It’s a very poignant headline because if you consider what went into making it, you quickly realize how utterly insane our system for funding Social Security benefits has been, and immediately understand the thing to do to rectify the insanity — pay Social Security benefits out of general revenues.

The reasons for doing so are obvious. It’s infinitely fairer to do so; would create a more transparent funding system; and would improve this country’s credit standing (now actually threatened with a downgrade) in the process. All done without in any way reducing benefits paid out to Social Security recipients.
 
Our present Social Security funding mechanism was most recently “reformed” a few decades back under the guidance of that Ayn Rand groupie, Alan Greenspan. He helped concoct one of the most regressive taxes on the planet as part of this reform, one that starts collecting a flat rate from the poorest of our workers while exempting the richest.

Why was this approach adopted by Congress? There’s a simple explanation. For years collecting more from the payroll tax than actually went into paying benefits generated a surplus. By using this surplus to purchase only Treasury bonds, and by then (and this is the key point) not including this Treasury borrowing in the publicly announced size of yearly federal deficits, decades worth of administrations in Washington were able to pretend our national borrowing was smaller than it actually was and overspend accordingly.

This long worked well (from Washington’s perspective). Literally trillions in new debt ($2.5 trillion to date) was incurred without letting on to the general public. A great idea, except that like any Ponzi scheme, now that the time has arrived when more has to be paid out than the payroll tax is bringing in, there’s hell to pay for the promoters of this game — and the rest of us.

There’s an alternative, however. A simple, straight forward one. Though it almost certainly won’t be adopted because it won’t create a need for endless bipartisan commissions that inevitably opt for changes that screw most of our workforce to a greater extent while protecting the wealth of the wealthiest. Here this alternative anyway:

Do away with a payroll tax separate from the income tax, while paying out the same benefits to Social Security recipients as they get at present. And abolish the Social Security Trust that was supposed to pay out the difference between money collected from the payroll tax and benefits due because this trust would no longer be required, and can’t do so anyway because it has been totally rifled by Congress since being created.  

What’s the upside of these changes? Since at present almost 75 percent of workers pay more in payroll taxes than they do in income taxes, and we have an income tax system that is at least semi-progressive, even though income taxes for everyone would go up, three-quarters of our workers would end up with a net reduction in their total taxes — indeed, the biggest tax break for this group in history — while upper income taxpayers would end up bearing a larger share of the Social Security burden.

And here’s a really nice added element of this approach. The Social Security Trust has become an absurdity. It’s filled with Treasury paper requiring it pay interest to the Treasury — paying itself, and borrow to pay itself. Even in the overall looking glass world of Washington bookkeeping, this cuckoo financial sleight of hand is now beyond the fringe. It no longer even benefits the short-sighted, small-minded, foolish men and women who allowed it to come into being.

So let’s just abolish it. And this being Washington, you should do so in a way that allows all involved to preserve their cloak of good governance. Using some New Age accounting technique or other you “sell” the Trust’s assets (government bonds) to the government, which takes over the Trust’s obligations in the bargain. The Trust ceases to exist while the ultimate party responsible for paying its benefits, which in fact has always been the ultimate party responsible for paying its benefits, still pays its benefits.   

And what’s the big added advantage of this arrangement? The U.S. government rids itself with the stroke of a pen of $2.5 trillion of debt. This improves its position dramatically because this $2.5 trillion in debt brings down our total $12.6 trillion government debt by about 20 percent, making us a much better credit for the Chinese and Japanese who now in large measure keep this country afloat.

Turning Social Security into a pay-as-you-go operation, rather than a never ending shell game, with a bookkeeping gambit egregious enough to send ordinary folks to the slammer for a very long time, may come across as fatuous or even silly. But wake up people. The entire international debt market is today based on inherently fatuous and silly assumptions and bizarro bookkeeping.

In the greater scheme of things, this approach is just playing the game more justly, and more prudently.

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