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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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Copyright 2010 The Moderate Voice
  • $1690528

    You do realize that the entirety of the Federal tax code is pretty steeply progressive. The bottom quintile has a tax rate of about 4 percent and the top quintile has a rate of about 24%. This ratio of 6 to 1 is about double the ratio that existed in 1979 (before the horrible Reagan tax cuts).

    No doubt the ss tax regime is regressive but it exists in the context of a steeply progressive overall regime. The lowest quintile’s income tax liability current stands at negative 6 percent. Hard to be more progressive than that.

    The other issue with doing away with the tax from the perspective of program supporters is that it would require they give up the fiction they have reinforced with voters for decades — that somehow paying my social security taxes today entitles me to receive benefits tomorrow because I’ve paid for them.

    That said, I’m in favor of your proposal as long as you are in favor of ending SS as a “mandatory” spending item consistent with its being funded out of general revenues.

  • ProfElwood

    I thought the “trust fund” wasn’t counted as part of the debt.

    • $1690528

      It’s part of the total debt but not the public debt, which is the number to which people most often make reference.

  • allenwsmithphd

    It is good to find someone else writing about the empty Social Security trust fund. Most articles about Social Security, including those in the New York Times, simply ignore the fact that the trust fund contains no real assets. I agree with your portrayal of Greenspan. The Greenspan commission recommended raising the payroll tax in order to build up a reserve with which to pay for the baby boomers’ retirement benefits. The substantial payroll tax hike enacted in 1983 has generated $2.5 trillion in surplus Social Security revenue. But none of it was saved or invested in anything.

    It is not correct to say the Social Security surplus was invested in Treasury bonds or even IOUs. It was not invested in anything. If you have a thousand dollars in a saving account you can invest it or you can spend it on a vacation trip. However, once you spend it on the trip, there is nothing left to invest. Since all of the Social Security surplus revenue was spent on wars and other government programs, there was nothing left to invest in anything. The IOUs simply represent a debt between two divisions of government. The Treasury Department owes the money to the Social Security Administration. Since both entities are a part of the federal government, it all boils down to the fact that the government owes itself $2.5 trillion. The government is neither richer nor poorer because of the IOUs. It is just like you taking money from your left pocket and putting it in your right pocket. Even if you put IOUs in your left pocket, you have no more money than you had before you made the transfer between the two pockets.

    I have been trying to expose the Social Security scam for more than a decade, but nobody would listen. I appeared on CNN Today, with anchor Lou Waters, on September 27, 2000 to discuss my then newly published book, “The Alleged Budget Surplus, Social Security, and Voodoo Economics.” I tried to convince Waters that the government was spending Social Security money on other government programs. He just looked at me in disbelief and asked, “Are you a voice crying in the wilderness?” As it turned out I was a voice crying in the wilderness in 2000, and I have continued to be such a voice ever since. During that ten-year period, I have published four books on Social Security, the latest being “THE BIG LIE: How Our Government Hoodwinked the Public, Emptied the Social Security Trust Fund, and caused The Great Economic Collapse.” In addition, I have appeared on The Dolans (CNNfn), on CNBC, and on more than 170 radio talk shows in my crusade to expose the scam. I made extensive efforts in 2000 to persuade Al Gore to break ranks with Bill Clinton and pledge to end the raiding of the trust fund.

    I have been outraged ever since I stumbled onto the scam more than ten years ago, and I have wanted to tell the whole world so everybody would be outraged. The fact that our government has “borrowed,” “embezzled,” or “stolen” $2.5 trillion of workers’ contributions to Social Security has to be “the greatest fraud ever perpetrated on the American people by their government.” Like Harry Markopolis, who unsuccessfully tried to expose Bernie Madoff for nine years, I have been trying to expose the Social Security scam for more than a decade, but nobody would believe me. I urge everyone who cares about the future of Social Security to visit my website at and learn the rest of the story.

    Allen W. Smith, Ph.D.
    Professor of Economics Emeritus
    Eastern Illinois University

  • DLS

    The Trustees have tried to warn everyone, and some of us have echoed the warnings.

    * * *

    “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.”

    How are the full benefits paid for? You’re missing something essential.

    I’m not surprised a lefty would “neglect” such obvious things, but —

    Are you saying (if you can think of it) that all benefits should be paid for as “mandatory” spending? Poof, no work done to say how the taxes would be paid? Or do you also believe that all the benefits should come out of the general fund and paid for by progressive income (and someday, wealth taxes) as Conyers says he would like, though even his Medicare for All bill doesn’t include, just the expression of intent?

    (And do you know that many want Medicare done that way, too, for everyone?)

    [shaking head]

  • DLS

    “I’m in favor of your proposal as long as you are in favor of ending SS as a “mandatory” spending item consistent with its being funded out of general revenues.”

    This is one of the last things the politicians later this decade, before 2020, will do with entitlements before they retire in droves once the end of the fun times is not only apparent but nearly tangible.

  • chipsilicon

    It’s fine to point out that no actual wealth is represented by the SS “trust fund,” but what you fail to note is that the portion of SS spending that is financed by “cashed in” T-bonds IS being financed in the same way as any other federal spending. You are utterly, completely, and staggeringly wrong in claiming that abolishing the payroll tax would somehow improve the US government’s ability to sell its bonds on world capital markets. Extinguishing a “debt” that is owed to itself does not improve the government’s balance sheet.

    Moreover, your claim that replacing the payroll tax with an income-tax increase would be “infinitely fairer” is nothing more than a demand to increase tax rates on people earning over the ceiling on taxable wages and salaries. You can argue for doing that, of course, on any grounds you like, but you can’t claim that it would be “infinitely fairer” as if that were somehow an obvious fact, because there’s not a compelling case to be made that tax progressivity is “fair” at all.

  • DLS

    The Left has frequently used “fairness” as a synonym for “progressivity” when discussing the income tax and tax policy. There is no synonymity, of course. It’s just revealing some of the claimants’ emotions.

  • chrisgranner

    A delightful topic from the dismal science.

    How do we, as a community, pay for the things that make us a community? Call them taxes or call them fees or fines: either we discourage certain behaviors (see HCR fining mandate non-compliance) or we distort a free market (see any taxes on things that we actually want more of, like income, capital or employment). What do we get for writing such checks? In this case we get some sort of social safety net. In fact we get the most beloved — and successful — government program in the history of government programs: a basic retirement, survivor and disability benefit for all, without ever pretending to be more than that (certainly SS was never intended to be a SOLE source of retirement income).

    Mr. Silverstein correctly points out that the SS trust fund is a legal fiction, and repayment of the obligations it holds is precisely a zero-sum proposition. Furthermore, I agree that unifying the federal budget would introduce a badly-needed degree of transparency in our annual budget exercise.

    But here’s the thing, kids: We think life is pretty good in this country when the overall tax rate from all government levels is around 36%. (I got this from the fabulous book “The Price of Government.”) Since the end of WW2, we’ve never (until 2005) allowed ourselves to deviate more than 2% in either direction: 38% produces a tax revolt, 34% produces loud demands for more government services. In 2005, we dropped below 34% and we’re at about 32.5% now.

    Don’t get me wrong — we’re SPENDING like there’s no tomorrow. But our appetite for PAYING for all that spending has been “Reagan-Thatcher’d” out of us. If we expect to keep up our historical levels of growth, we MUST raise more revenue (if we simply balance the budget either by inflating the debt away or just by cutting spending, either inflation or reduced economic output will likely result). Only by BOTH properly prioritizing what we spend public money on (PLEASE deliver us from another unnecessary war!) AND calibrating the least economically distorting ways to raise revenues, will we pull back from the brink we now approach, headlong and heedless of the growing chorus of chicken littles.

    Long story short: let’s start taxing waste and consumption, and replace the money we raise thereby (somewhat regressively) with a dollar-for-dollar exemption from the payroll tax (importantly, from BOTH sides of the payors of that tax, employer and employee — that way it’s a job creator too). Good luck getting our fearful leaders to abolish the trust funds & lock boxes; that would take an Obama. Wait…

    Happy, healthy, safe & serene,

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