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Readers Blog

Starving Social Security

President Barack Obama's proposal to cut  the Federal Insurance Contributions Act  (FICA) tax  would cost the Social Security Trust Fund  about  $240 billion in 2012 .(1)  This proposal is a dagger aimed  at the heart of the system that most  senior citizens  depend upon for their economic survival. (2)

This year employees pay 1.45% of their income (up to $106,800) for Medicare,  plus another 4.2%  for  FICA, while employers pay  6.2% of payroll.  Obama proposed last night to reduce both  FICA   payments to  3.1%  of  the employee's income for 2012.  The  one-year cut is intended to stimulate hiring by businesses and spending by employees.  Even if it works as intended, I  believe it would  bankrupt  Social Security.   Here  is why:

1. High unemployment  will persist for years.

For the first time in US history, we have  an  unemployment  rate  over 9%  and a Dow  over  11,000 at the same time.  Thanks to on-line commerce,  automation and  out-sourcing of  manufacturing work, American businesses have learned to thrive  with fewer American workers.  No combination of tax cuts and regulation reforms will persuade these firms to hire more workers than they really need.  Moreover,  most of the unemployed lack the  education and technical skills required  for jobs in our  post-industrial economy.  The 2009 Stimulus barely dented unemployment, and the proposed new one  will not do any better.   Accordingly, high unemployment  will continue to be a problem for years to come, no matter who wins the 2012  presidential and congressional elections.

2.  FICA tax-cuts will be permanent.

If you cut a tax by 50%, you have to double it  just to  regain the previous  revenue.  Once the  non-Medicare portion of the  FICA tax goes down to  3.1% of  income,  Congress will never  double it to the 6.2% that prevailed before 2011, especially if   unemployment remains  high.   The FICA tax  hits the poor and working class the hardest,  so the Dems would not dare raise it at all, let alone by  100%.  The Republicans are against all taxes  (especially  for  Social Security, which they despise), so they won't  raise the FICA  tax either.  Even if the economy reverts to  Clinton-level  prosperity, Congress will never  restore the 2010  FICA tax rate.

3. Social Security will crash.

Calculations based upon 2010 FICA  tax-rates   and benefit rules indicate that  the Social Security  Trust Fund  will go broke in about  25 years.  But if  the revenue  is reduced by $240 billion  or more  per year,  the  Trust Fund  will run out  much sooner.   Once that happens,  Congress will be faced with three  obnoxious options:  (a) raise taxes, (b) borrow enough money to keep paying promised benefits to seniors and (c) cut  the benefits to match  current revenue . Given the political courage we see in Congress today, I   would predict  (b) will be chosen, but that path is not sustainable for long.  Those, like Rep. Paul Ryan and Gov. Rick Perry, who predicted that Social Security could not survive will then gloat that they were right all along.

The truth is that with  three  modifications (3),  none very painful,  Social Security can be  secured for future generations.  But the long-term survival of the system depends upon  the revenue  needed to fund it this year every year  hereafter.    Let's not blow it !

Gerald S Glazer

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(1) Binyamin Applebaum in the NY Times,  Sept. 9, 2011.

(2) About half of all  Americans  over 65  depend  upon Social Security benefits for most of their income.

(3)  Raise the base income for the tax to $150,000,  gradually raise the age for full benefits to about  70  (with reduced benefits available at 65) and  transfer   the disability-benefit  program  to  Medicaid.

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solitarius | Sept. 9, 2011 at 12:44 p.m. (report)

EXCELLENT!!!!!!!!!!!!!!!!!!!!!!!!!!!

This also proves that Social Security is a Ponzi scheme as suggested by many. Social Security is in major trouble regardless given the large number of Baby Boomers who are now starting to retire. Cutting the payroll tax will kill Social Security much faster than expected.

But why did Obama suggest doing this? Obviously he knows this will kill Social Security. Those who support Obama need to ask themselves this question, because it is very revealing about our president. When Obama supporters seriously address the reasons for this choice, they will finally understand who their president really is.

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