Governments of most industrialized nations are staggering under mountainous debts. Aging populations and slowing economic growth have undermined generous welfare states. Least affordable are public pensions modeled after the infamous "investment" scheme popularized by Charles Ponzi. Collect money from current taxpayers to pay current beneficiaries, and let the future take care of itself.
With Washington facing its fourth straight trillion-plus dollar annual deficit Congress should be imposing tough budget cuts. But despite last year's multiple budget battles, Congress and the White House still refuse to confront America's spending problem. Republicans won't propose any serious reductions — such as means testing Social Security or Medicare, reducing military outlays, or slashing corporate welfare. Democrats just want to find someone else to tax.
Yet legislators currently are debating extending a temporary reduction in the Social Security payroll tax, which will lower federal revenues this year by$160 billion. With the two percent reduction set to expire on February 28, legislators are deadlocked over the details as both sides maneuver for political advantage.
But exactly how Congress fills this year's added budget gap doesn't much matter. Far more significant may be the long-term impact as the tax reduction erodes Social Security's political foundations.
The program is America's number one Ponzi scheme. It was created as a pay-as-you-go system but sold as social insurance with a special tax and a trust fund. President Franklin Delano Roosevelt created the illusion for political effect: "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions." As a result, he said, "no damn politician can ever scrap my Social Security program."
But "his" system is wrecking America's finances. The largest domestic program, it will cost about $765 billion this year, more than will be spent on the military.The system turned negative in 2010, years earlier than expected, and is not likely to again run a surplus. Last year total unfunded liabilities for Social Security were estimated at $21.4 trillion, an increase of$1.4 trillion in 2011 alone.
There is a nominal trust fund, but it contains only worthless non-recourse bonds requiring the Treasury Department to repay the Social Security administration for the money borrowed. Even without those pieces of paper — which sit in a file cabinet in an office in West Virginia — politics would force the Treasury Department to "repay" the money. Alas, Congress will have to come up with the cash, presumably through more borrowing, higher taxes, or spending cuts.
The system's technical insolvency has not stopped Congress from preparing to extend last year's Social Security tax reduction. Job growth remains slow and the payroll levy acts as a direct tax on employment. In 2010 legislators exempted employers from "their" 6.2 percent share on new hires. Last year Congress dropped the rate for employees from 6.2 to 4.2 percent for the year.
Unfortunately, temporary rate reductions typically do little to promote long-term growth, since no company wants to add someone now only to have to fire them a year later. Moreover, by spending more money which it doesn't have Congress is further undermining America's fiscal future, which will reduce investor confidence in the American economy. Businesses will be less likely to expand and take risks.
Nevertheless, the political appeal of saving the average family about a thousand dollars a year is obvious. And a desperate Congress, unwilling to slash the unproductive and wasteful spending which pervades the federal budget, can think of little else to do.
Yet if legislators really believe Social Security to be social insurance, that is, self-financed by beneficiaries, then cutting the payroll tax is stupid even for Congress. The system already is financially unbalanced. How can the President and Congress reduce funding for Social Security and still keep faith with seniors counting on future checks?
They can't, unless policymakers acknowledge that Social Security is a fraud and political lie — in fact, a government Ponzi scheme. They must admit that program benefits have nothing to do with program taxes. Which means Social Security is not social insurance. And no one is legally entitled to any benefits.
That's always been the reality, despite the fake trust fund. Until now, however, no major political figure has been willing to acknowledge the truth.
But cutting Social Security taxes despite the program's de facto insolvency has effectively severed the supposed connection between taxes and benefits. The Internal Revenue Service even announced that "this reduced Social Security withholding will have no effect on employees' future Social Security benefits." Having ostentatiously separated taxes and benefits, Congress cannot easily put them back together.
Warned Social Security trustee Chuck Blahous, legislators were breaking "the link between contributions and benefits." For this reason the AARP expressed its concern last year: Vice President Nancy LeaMond insisted that the money be quickly repaid to "avoid undermining Social Security's long-term funding stream." Good luck.
Although Republican presidential candidates Mitt Romney and Newt Gingrich supported the tax reduction, Michelle Bachmann and Rick Santorum opposed the cut. Contended Bachmann: "It's put senior citizens at risk." Leading Senate conservatives Jim DeMint (R-SC) and Ron Johnson (R-WI) voted against the measure. The latter warned that "We will bankrupt Social Security."
Two of the Senate's most left-wing members, Iowa's Tom Harkin and Vermont's Bernie Sanders, also criticized the measure. Moreover, a gaggle of Democratic Congressmen wrote President Obama expressing their fear that the cut "may be used as the first step in a larger battle to fundamentally dismantle Social Security."
We can only hope so.
Advocates of limited government and fiscal responsibility should use the payroll tax cut to shrink Washington spending. Republicans should press for a permanent tax rate reduction. In fact, Congress should cut the employer's "share" — actually paid by employees — as well. The Social Security tax directly penalizes job creation. A permanent reduction would encourage employers to invest and expand. Let's put America back to work.
Of course, shrinking Social Security tax rates would significantly worsen the program's long-term unfunded liabilities. Yet this could help make obvious even to the most fiscally obtuse the necessity of enacting serious budget cuts.
End welfare for business. Get rid of the inefficient and wasteful farmers' dole. Stop providing "foreign aid," which so often acts as foreign hindrance. Clear out the underbrush of dozens and scores of duplicative and unnecessary programs. Kill low priority grants to individuals, groups, and local and state governments. Stop trying to pump up the housing industry. Quit using the U.S. military as a form of foreign aid, subsidizing prosperous and populous allies around the world, including the Europeans, Japanese, and South Koreans.
Equally important, advocates of fiscal responsibility should use Social Security's worsening financial situation to press for entitlement reform. For instance, instead of taxing the rich, why not stop paying them benefits they don't need, including Social Security and Medicare? It should now be obvious to all that the programs are not social insurance, so there is no reason to act as if they were. While Uncle Sam should make good his promises to current beneficiaries, young people should be allowed to opt out of the system, putting their money into private investment accounts.
Finally, the rate cut offers a good start for tax reform. The payroll tax is a bad tax, a direct penalty on job creation, and should be ended. At the same time Congress should rationalize and simplify the overall system, lowering rates while broadening the base. Either a flat income tax or a consumption tax would be an improvement. Eliminating the payroll tax would make sense in either case.
The temporary payroll tax break well illustrates the poverty of Washington policy-making. However, the shameless battle for political advantage still could advance fiscal responsibility. By wrecking the illusion that Social Security is social insurance, the rate cut should help spark a desperately needed debate over the role of government in America and especially the future of America's bloated welfare state.