Sunday, December 12, 2010

The leaky lockbox

Of all the weird stuff surrounding the tax deal (Bill Clinton and President O, mortal enemies, now together??), I think the weirdest of all is the idea that cutting the payroll tax imperils Social Security.

Let's sort this one out right here, OK people?

First, at the meta-level, money is fungible. It's very difficult, if not impossible, to earmark funds even when you try. This is what makes humanitarian aid to oppressive dictatorships such a morally murky area.

Second and most relevant though, is the fact that payroll taxes are NOT dedicated only to paying social security benefits. That's right, not only are your personal contributions NOT saved to fund your social security benefits, aggregate annual payroll taxes are not used explicitly to fund social security. The money is spent, period. On what? it's really impossible to say (see the above paragraph).

Yes, I know, Al Gore told us there's a lockbox with our "contributions" safe inside.

People, it's a lockbox with a 100% skim rate (i.e. not a lockbox at all)! Get Al to let you look inside; that sumbich is empty!

In truth, there really isn't much "imperiling" social security; it's the stream of future health spending obligations that are unsustainable. A combination phasing in partial means testing for benefits, and phasing in a slight rise in eligibility age could easily solve any "problems" that might be conjured up.

But the cut in the payroll tax doesn't "imperil" social security any more than it "imperils" the defense budget or the Pell grant budget.

If benefits aren't altered, then the day that payroll tax revenues fall below benefit payouts, what will happen? Nothing! Benefits will be paid out of general revenues just like they've effectively always been paid.

While tax cuts may imperil future spending (that's the essence of "starve the beast", no?), there is no real link between the type of tax being cut and the type of spending being imperiled.

2 comments:

Chris A. said...

This is completely true.

In Canada, the federal Finance Minister Paul Martin slayed the federal deficit by skimming money off of the Employment insurance fund, which was huge and bloated, and transferring it to general spending. Tada! The deficit is gone.

Recently in Ontario, Premier McGuinty instituted a health care tax to tackle long waiting times. Guess what? It's unclear to most Ontario residents and analysts where in fact that money was spent. But I have a hunch - the money was put into the general revenues.

John Thacker said...

I think that the problem is that people believe the fiction that they're only getting back what they've paid in.

The entire problem with the program is that almost everyone is promised what they paid in (plus inflation), and the poor are promised significantly more, since only getting out what they put in wouldn't be enough to retire on.

Of course, for this same reason, more immigration (while good for other reasons) doesn't actually solve the problem, only kick it down the road, since the new immigrants would also end up being promised more than they paid in.