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
(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.