I have usually never met a tax cut I didn’t like. But the House passed a bill Tuesday (yet to be voted on by the Senate) extending the reduction in the employee’s portion of the payroll tax (set to expire the end of December), which since 2010 has b
een 4.2 percent instead of the usual 6.2 percent. The premise is that this additional 2 percent “bonus” in workers’ paychecks will stimulate consumer spending and boost the economy, which has yet to happen.
However, what the payroll tax deduction does boost is the unfunded obligations of Social Security. Since January 2010, total Social Security benefit payouts have exceeded payroll tax revenues 15 out of 22 months. Each deficit month must be covered by general revenues (or, for those who believe it actually exists, the Social Security “trust fund,” which is treated like general revenues and spent on other programs).
One may argue that this particular tax cut is no different than other tax cuts, like the extension of the Bush tax cuts, reducing capital gains taxes or cutting corporate income taxes. But in principle, it is different. The amount of payroll taxes that a worker pays over his working years is a function of lifetime wages (although to a lesser extent than in the past), which then determines lifetime benefits.
In other words, Social Security should be an example of postponing present consumption for future benefits. Symbolically, extending the payroll tax reduction sends the message that spending for today is more important than saving for tomorrow. Furthermore, it does nothing to stimulate hiring since it is the employee’s portion, not the employer’s that is reduced.
Both the right and the left admit that entitlement reform is needed. Many financial experts bemoan the lack of personal saving, particularly among baby boomer. I f the payroll tax cut is going to be around for awhile, why not make it a springboard for personal retirement accounts? Require that it be automatically deposited into an individual retirement account (IRA) with a limited number of index-type funds for workers to choose from.
Many workers, particularly younger ones, are aware of the need for Social Security reform and may be open to trying a different approach rather than continuing with the unsustainable status quo. For them, a personal account would be a great place to start.