January 15 2013

About That Payroll Tax...

Carrie L. Lukas

Americans were somehow shocked to learn that it wasn’t really just “the rich” who were going to pay higher taxes after the fiscal cliff deal was struck, but all Americans. 

The biggest surprise was that the payroll tax holiday—that’s the two percentage point rate reduction that Americans have enjoyed in recent years—is over.  Americans will resume paying 6.2 percent of their paychecks into Social Security, an amount matched by their employers, which means that one out of every eight dollars an employer pays for each worker goes into the Social Security system.

Many rightly complain that the payroll tax is a bad tax:  It makes working less profitable, therefore discouraging people from productive activities.  Already cash-strapped, middleclass American families will now have smaller paychecks each week, which means they’ll have less to spend on food, gas, clothing, and businesses will have fewer costumers as a result. 

All that’s true. 

But I actually believe that it’s a good thing that the payroll tax holiday was allowed to end so that Americans are reminded of the real costs of our Social Security system.  After all, even the full 12 percent payroll tax isn’t enough to cover Social Security’s current obligations.  To make ends meet, the SSA is having to trade in bonds from the “Trust Fund” to the Treasury in exchange for a share of general tax revenue.  That’s really one government pocket taking money from the other pocket, but it’s an important exercise in terms of what it says about the Social Security system's finances.

As Baby Boomers continue to retire, Social Security costs will explode and more and more of our general income taxes will have to go for this one program.  That means there will be less for defense, education, health care, environment, roads, and everything else that government does and people care about.     

Americans should all be asking if our current pay-as-you-go Social Security system is really the best that the government can do.  Is it really fair to young workers who cannot expect to get back anything close to what they are paying into the system?  Do we really one more than one-fifth of all federal government dollars going to this one program?

That’s an important conversation to have.  As I’ve written before, I find it bizarre that those on the Left who would happily tax away all earnings of the hated “rich” consider it high treason to suggest asking those “rich” to forgo one penny of promised future benefits during their decades-long retirements.

Isn’t it time to consider slowing the growth of future benefits for America’s richest senior citizens?  As working Americans make sense of their smaller paychecks this week, I hope that’s a question that they start asking.

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