Squaring Social Security and the Payroll Tax Cut
Topping the list of unfinished business this year is the impending collision of two closely related crises: the expiration of the payroll tax cut and the acceleration of Social Security’s bankruptcy.
Last year, Congress voted for a payroll tax cut that averages roughly $1,000 for every working family in America.
As warned, it failed to stimulate economic growth and it accelerated the collapse of the Social Security system. But as promised, it threw every working family a vital lifeline in tough economic times.
We need to meet three conflicting objectives: we need to continue the payroll tax cut; we need to stimulate real economic growth and we need to avoid doing further damage to the Social Security system.
But first, we need to understand that not all tax cuts stimulate lasting economic growth. Cutting marginal tax rates does so because this changes the incentives that individuals respond to. Cutting infra-marginal tax rates – such as the payroll tax – does not.
But cutting the payroll tax did make a huge difference in the ability of working families to make ends meet in a time of declining family incomes and inexorably rising prices. To restore that tax today, given the economic pressures on working families, is simply unthinkable.
Yet at the same time, the payroll tax is what supports the Social Security system. Last year, that system entered a state of permanent deficit – and this condition will worsen until the Social Security system bankrupts in 2036. At that moment, every retiree will suffer a sudden and permanent drop in benefits of roughly 25 percent.
Further reducing revenues into the system will hasten that day of reckoning. Just as bad, in the intervening time the expanding Social Security deficit will heap growing burdens on the nation’s already staggering public debt.
Some have proposed paying for the infra-marginal payroll tax cut that doesn’t help the economy, with a marginal tax hike that actually harms the economy. Surely we can do better than that.
Actually, Congressman Landry of Louisiana has done better, and I commend his proposal to the attention of the House. It avoids damaging the Social Security fund while at the same time offers families continued relief from crushing payroll taxes.
His measure, HR 3551, the Social Security Preservation through Individual Choice Enhancement (or SSPICE) Act, constitutes the most realistic and innovative approach to these twin and related crises that has yet been placed before Congress, by linking the cost of Social Security to the benefits that it provides.
HR 3551 would give every American the choice of paying a lower payroll tax each year in exchange for working a month longer. That’s all it would take to pay for itself: a month’s delay in retirement for a year’s worth of tax relief.
For the first time, individuals can make this choice to pay a lower tax based on their own circumstances, without further undermining the fiscal integrity of the Social Security system or the financial security of those relying on that system.
For the first time, costs and benefits would be linked in a manner that all consumers can understand and judge for themselves based upon their own circumstances.
In a difficult year like this, I think most families would opt to save the extra tax and work the extra month. In better times ahead, they may chose to pay the extra tax to maintain their retirement schedule. But it will be their choice, based on their needs, their plans, and their best judgment – and not the government’s.
And by linking costs with benefits, it will protect the long-term actuarial soundness of the Social Security system, a fact that Social Security’s Chief Actuary has confirmed.
I’m excited to co-sponsor Mr. Landry’s bill and strongly and enthusiastically recommend it to the membership of the House and to its leadership. Mr. Landry has done an enormous service to every retiree who depends on the Social Security system, as well as to every working family struggling in America, by preserving the fiscal integrity of the system while at the same time giving every American a choice that links the tax they pay to the benefits they receive.
And it is an option they can exercise every single year without fear that a future Congressional Act – or failure to act -- might sock them with a tax increase they can’t afford or hasten the collapse of a retirement system that many depend upon for their economic survival.
House Chamber remarks by Congressman Tom McClintock, December 6, 2011.