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December 14 2011

Social Security's Accounting Holiday--How Long Can It Last?

Carrie L. Lukas

The media is covering Congress's deliberation about whether to extend the payroll tax holiday (and if so what should be included as a part of the package) as another political game of chicken.

This debate certainly is a big part political spectacle. But while liberals and their media friends may lament Republican efforts to force the Keystone Pipeline approval into the package, tying controversial, favored legislation to must-pass bills is hardly a new tactic. It's really political 101. And in this case, the Keystone approval is actual good policy.

Yet beyond the political tug-of-war, the debate over extending the payroll tax holiday should encourage a more serious look at our current method of funding Social Security and that program's financial future. As E21's Chuck Blahous writes:

The ongoing effort to partially convert Social Security from payroll-tax-financing to income-tax-financing – by further cutting the payroll tax as a stimulus measure and replacing the funds with general revenues – may in short order put an end to the longstanding conception of Social Security as a benefit earned by worker contributions. The demise of this conception would also threaten the special political protections Social Security benefits have long enjoyed.

I'm not concerned about the last item—and in fact it would be a good thing if Americans became more comfortable with the idea that it's not heresy to consider scaling back some benefits, including Social Security benefits, for wealthy seniors and future wealth seniors.

Yet this idea that payroll taxes can be cut without affecting Social Security's financing is a helpful reminder of the fundamental absurdity of the Social Security Trust Fund, and the lengths to which current generations go to hide the fact that they plan to stick-it to their children and grandchildren.

Basically, politicians want to cut payroll taxes, which fund Social Security, for current workers but then pretend that payroll taxes were paid in full for the purposes of Social Security's funding.

That's a little like a family that has made it a policy to always put away 10 percent of their income for retirement, but then decides that it's a real drag to do without that extra consumption, so spends all the money, but decides just to pretend they put away retirement savings so that they can continue earning interest for the future. That may sound like fun, if you could get your bankers to go along with it and credit you as if you kept saving.

Luckily for Uncle Sam, it can make the SS Trust Fund bankers play along with the game! So now in celebration of the “holiday” SSA pretends like it's received a bunch of extra money and keeps collecting government IOUs, which earn interest. Years down the road, SSA will cash those in, forcing our kids to pay extra taxes to make good on these all-too-real bonds.

If this accounting practice actually worked, then smart politicians would propose a surefire, pain-free way to ensure Social Security's solvency forever: let's just issue an extra $100 trillion into the Social Security trust fund right now and be done with it! Rather than actually pay for it, we can just pretend we did.

And that's fine, until taxpayers realize that all the bonds SSA has to cash in require real money for Social Security checks to go out. Ultimately Social Security will drain the general treasury and force income tax hikes on future generations.

This is a useful window into government financing, and taxpayers would be wise to keep in mind that we can only take a holiday from basic accounting for so long. Ultimately someone is going to have to pay-up.


 

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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