How Do You Like Paying Twice For Social Security This Year?

by FRANK HILL April 30, 2012

You know, we can't wait for the date when we can 'make your day!' as Clint Eastwood used to say and write these words in bold letters:

'Everything is getting better on the budget and entitlement fronts of the US federal budget!'

This is not that time yet.  Sadly.

In fact, it is getting dreadfully worse on a daily basis as the most recent Social Security Trustees report lays out with excruciating and incriminating detail from our friend, Chuck Blahous with whom we worked on the 1994 Entitlement Commission.

Chuck is a good guy to follow on anything relating to Social Security or Medicare trust funds for that matter.  You should sign up for his blog and follow him closely.

Like the old saying says:  'If Chuck doesn't know the answer to your questions about Social Security and Medicare trust funds, you don't need to know it in the first place.'

It used to be that all you had to do was quietly lip-sync the words: 'Social Security is going broke' and the Claude Peppers and the Tip O'Neills of the world would go running stark-raving mad down the middle of Constitution Avenue to the White House screaming for an emergency solution to be passed in Congress...immediately to SAVE SOCIAL SECURITY!'

Today? We are running multi-billion annual deficits in Social Security and the Obama Administration doesn't even offer a budget to fix it that can get one single vote in the House or Senate from Democrats or Republicans. The Senate Democrats who control the US Senate under the absentee leadership of Nevada Senator Harry Reid have now set a world record for not passing a budget to deal with Social Security or anything else for that matter...1,092 days now and counting.

The American Civil War was fought and prosecuted and brought to an end in only 1,458 days...and the US Senate can't pass a budget in Washington DC in less time than that terrible period in our nation's history?

At least the Republicans have passed the Ryan budget in the House of Representatives, we give them that much.

While we like much of what Congressman Ryan is trying to do to rein in the growth of federal spending, we would love to see more aggressive action on reforming both Social Security and Medicare which we think would actually produce stronger and more stable programs for all of us going forward on both the practical application and the budgetary implications of said reforms.

We urge you to read Mr. Blahous' pithy comments in detail because you will know far more about the stresses now facing Social Security and Medicare than you do right now today. 10,000% more probably.

While you read it though, we do want to plant this seed in your brain to mull over as you do so:

'How do you feel about paying for Social Security twice in this calendar year?'

Assuming, of course, you are one of the fortunate people to have a solid-paying job now and are also fortunate enough to have it pay you enough that you are in the 53% of the working population paying income taxes on top of the payroll taxes everyone pays up and down the wage-scale in the only 'true' flat-rate tax we have in America today.

That is a mouthful but hear us out here:

In most years, you are paying 7.65% of your salary in payroll taxes, FICA for short, that cover Social Security and Medicare Part A benefits for the most part if you are an employee or 15.3% of your earned income if you are self-employed. There is a wage maximum limit for payroll taxation of $106,800 in 2010 for Social Security and no limit on earned income for Medicare taxes.

For the years 2011 and 2012, the employee's contribution has been temporarily reduced to 4.2%, while the employer's portion remained at 6.2% due to one of the few bipartisan bills passed in the last 2 Congresses under President Obama.

But this accursed recession has thrown so many people out of work and destroyed so many businesses that the current payroll tax collection is falling way, way below current obligations being paid out on a daily basis to current retirees.  Chuck says that the operating deficit for Social Security alone will be $165 billion in 2012 alone.  (Medicare is worse but we are focusing on SS right now and can't process any more bad news, can we?)

What happens when payroll taxes fall short of meeting current SS benefit obligations?  Does Congress raise payroll taxes immediately or cut benefits to bring them back into balance?

No, silly!  What are you smoking today?  Do you think they would be that reasonable or fiscally responsible and mature about it all?

Here's what is basically happening:

1) Every single penny of payroll taxes being sent to Washington today is spent on SS benefit checks being sent out every month.  Just like it has always been since inception in 1935.

2) The shortage of $165 billion in SS this year is essentially being paid by general revenues typically allocated to pay for defense, welfare, education, roads, environmental protection.  All the programs that defense hawks, rural development advocates and progressive liberals like.

3) And if it is not being paid for by the general tax revenue dollars in whole, the SS shortage is either whole or in part being paid for by the same funding process that everything else is being paid for nowadays:  with funds borrowed from the Chinese, other foreign sovereign nations and investors as well as domestic financial institutions.  (Would you buy a bond now yielding about 2% when you just have to believe inflation is going to out-race that by a factor of 2 or 3 times in the next couple of years?  Us neither)

So you are either paying out of general tax revenues for this shortage in SS this year or you are paying for the interest on the new debt being taken out to cover the shortfall.  And your children and grandchildren....well, they'll be paying for this debt for the rest of their natural-born days, won't they either in annual interest payments on the national debt or in paying down the principle...somehow, someway, someday, right?

This stark fact should put to rest the absolutely silly and absurd notion that we have set aside any of your payroll taxes paid over your working career in a safe trust fund somewhere ('lockbox' as Al Gore said during his 2000 presidential campaign) that is 'earning' cash interest somehow out of the ethereal world.

That big mountain of 'cash' in a trust fund simply does not exist.

Because if it were, don't you think we would see President Obama, Majority Leader Reid and Speaker Boehner digging that cash out to pay for this SS shortage with pickaxes and dynamite like it is some silver or gold mine instead of borrowing it like a beggar on the street from the Chinese?

They ain't digging anywhere, are they?

We need to reform SS and Medicare today to modernize both and bring them up to the 21st century in terms of portability, stability and equity for every American citizen.

Contributing Editor Frank Hill ran for Congress at the age of 28 and served as chief of staff for former Congressman Alex McMillan (NC-9) and Senator Elizabeth Dole (NC). He was a budget associate on the House Budget Committee for 4 years and worked on the 1994 Commission on Entitlement and Tax Reform. He now lives in Charlotte, North Carolina where he does some consulting and lots of worrying about federal spending issues.


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