Should Congress Raise the Payroll Tax When the Economy Recovers?

By Stephanie Kelton

Dean Baker has just written another piece on Social Security. Dean and I have always disagreed at some fundamental level on the best way to run opposition against those that are committed to weakening and ultimately destroying this vital program. Thus, while Dean and the MMTers are on the same philosophical team (we all want to preserve the program), we run our offence using very different strategical play books.

When it comes to Social Security, MMTers have taken many pages out of Robert Eisner’s play book. To my mind, no economist has been a more honest and forceful defender of the program. (Eisner was Professor Emeritus at Northwestern University and one of Bill Clinton’s friends and former teachers. He passed away in 2010.)  In my favourite piece on the subject, Eisner said:

The notion that Social Security faces bankruptcy begins with a fundamental misconception, that payment of benefits somehow depends upon the OASDI (Old Age and Survivors and Disability Insurance) trust funds. The trust funds are merely accounting entities….

…Our payroll taxes or “contributions” go directly to the United States Treasury. Our benefit checks come from the Treasury-and those receiving them can verify on those checks that the payer is the Treasury of the United States, and not any trust fund. Social Security payments are an obligation under law of the U.S. government. Our government and its Treasury will not,indeed cannot, go bankrupt. As Federal Reserve Chairman Alan Greenspan has recently put it, “[A] government cannot become insolvent with respect to obligations in its own currency.”

Baker’s latest piece is interesting because it shows that he has at least one foot in the Eisner door. He says:

While there is nothing in prin­ci­ple wrong with fi­nanc­ing So­cial Se­cu­rity in part out of gen­eral rev­enue for two or three years in the mid­dle of a se­vere eco­nomic down­turn, the ques­tion is what will hap­pen when the economy recovers enough that we no longer need this tax cut as stim­u­lus. In prin­ci­ple the tax should sim­ply re­vert to its nor­mal level.

When the economy recovers, Baker is worried that Congress will lack the political will to raise payroll tax rates, leaving the program vulnerable. He says:

If the Social Security tax were not re­stored to its for­mer level, then we could in prin­ci­ple con­tinue to make up the dif­fer­ence from gen­eral rev­enue. How­ever, there cer­tainly is no agree­ment that this will be done. Since its in­cep­tion, So­cial Se­cu­rity has been fi­nanced from the des­ig­nated pay­roll tax. This tax has been used to sus­tain the trust fund, which is in prin­ci­ple sep­a­rate from the rest of the bud­get.

Okay, there is a bit of MMT in here — the government could always make up the difference from general revenue — but the rest of the argument breaks sharply from Eisner, who explained that the perceived funding of Social Security through a dedicated payroll tax is nothing more than a useful myth.

Baker accepts that myth, arguing that as long as Congress has the guts to return the payroll tax to its original rate after the recovery takes hold, then the Trust Fund “would be suf­fi­cient to keep the pro­gram fully funded through the year 2038 and more than 80 per­cent funded through the rest of the century.”

To ensure that this happens, Baker proposes:

[A] very sim­ple way around this po­ten­tial prob­lem. If we want to give a tax cut to work­ers equal to 3.1 per­cent of wages, as Pres­i­dent Obama has pro­posed, along with a sim­i­lar cut to some em­ploy­ers, we can just write that into the law with­out any ref­er­ence to So­cial Se­cu­rity.

In other words, the tax cut would take the form of a tax credit that is paid out to work­ers and firms in ex­actly the amounts that Pres­i­dent Obama pro­posed. How­ever this credit would have no con­nec­tion what­so­ever to the So­cial Se­cu­rity tax, which con­tin­ues to get col­lected at its nor­mal rate.

MMTers would argue against this. Indeed, we have argued in favour of a more generous payroll tax cut — i.e. reducing FICA withholdings to zero for employees and the employers — and we would prefer to keep it that way so that the entire program is overtly, and permanently, funded out of general revenue.  Baker has vehemently opposed our policy recommendation, arguing that it would make the program vulnerable to attack if it lacked a dedicated source of funding.  So Baker wants to make sure the Trust Fund is “there” in order to protect Social Security from attack.

Here’s how Eisner dealt with the same problem:

Expenditures alleged to be related to trust funds are often less than their income-witness the highway and airport  funds as well Social Security. There is no particular  reason they cannot be more. The accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law. The Treasury  can pay out all that Social Security provides while the accountants declare the funds more and more in the red. 

For those concerned, nevertheless, about the “solvency” of the trust funds, there are simple, painless remedies for this accounting problem….why not award balances in the Trust Funds, instead of the current 5.9 percent interest rate on long-term government bonds, [a] higher return… [for] it was not God but Congress and the Treasury that determined the interest rate to be credited on the non-negotiable Treasury notes of the fund balances.”

So Congress could simply agree to credit the Trust Funds at 10, 25, 40, 100, or 500 percent, making the entire “problem” go away. At 100 percent interest, even the most pessimistic CBO official would have to give the fund a clean bill of health, and future retirees could get 100 percent of the benefits they have been promised.

Which solution should progressives advocate?  Baker’s tit-for-tat replacement tax that promises to preserve Social Security in its current state — able to pay just 80 percent of promised benefits to future retirees?  Eisner’s tongue-in-cheek remedy that artificially pumps up the size of the Trust Fund to astronomical proportions in order to placate the accountants?  Or the MMT solution that advocates a straightforward payment of promised benefits to all future retirees?

17 Responses to Should Congress Raise the Payroll Tax When the Economy Recovers?

  1. In terms of accounting, the approaches are equivalent. In terms of 'animal spirits', not so much. People feel they have earned their SS benefits because they have seen the deductions on their paychecks every week for 40 years. Thus they are strongly motivated to opposed people cutting them, because they see it as taking what they have earned. Many, however see receiving other government benefits as welfare and stigmatizing, and do not like their benefits being put in the same category of 'entitlements' as other benefits. I don't think that lowering the payroll tax for a small number of years will significantly change the resistance to cutting SS benefits, but it may in the longer run.

  2. Check out this quote found by the ever-erudite beowulf:“I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”http://www.ssa.gov/history/Gulick.htmlFrom the man himself! What could be more powerful than that proclamation?

  3. Powerful in that your hear from the man itself that SS doesn't need to be funded with taxes. The arguments over whether or not there should be a tax is obviously more complex.

  4. There is too much politics attached to this to not have a ss fund. As noted, there could attach a moral problem if it were seen generally as welfare (even though some will argue it is welfare). Maybe in time we will all grow up. Until then I like the idea of making "contributions" to the fund perhaps via high interest rates. I also like Baker's idea of a tax credit for the same moral hazard reason.

  5. and it seems to me that the regressive fica tax is at least just as regressive as social security cuts. so i support getting rid of regressive taxes like fica and truly strengthening social security by increasing benefits to a level of support for our seniors that makes us feel proud to be Americans.www.moslereconomics.com

  6. I think that the first commentor makes an intriguing point regarding the stigma of welfare and presumably WIC, SNAP, et al. versus Social Security. Furthermore the concern about potentially likewise stigmatizing Social Security in the long run is a valid concern.But, it is also possible that generalizing Social Security alongside government assistance programs could be a bridge to destigmatizing social welfare programs which would be a worthwhile benefit; risky but potentially beneficial.Finally, the MMT proposal to eliminate FICA could certainly garner support from small businesses, and rightly aligning workers and small firms against the existing oligarchies should be a winning argument.–Gabe Downey

  7. I don't know much about Professor Eisner, but I know as much as I need to know about Bill Clinton. He's the great guy who ended "welfare as we knew it". It's so much less stigmatizing to watch single moms and their kids crowding into tents and homeless shelters! He's the guy who hired Larry Summers to write the bill to repeal Glass-Steagall. He's the guy who helped his Arkansas cronies end Haiti's food self-sufficiency by wiping out their rice farmers with subsidized Arkansas rice. I could go on – there's Brooksley Born and the non-regulation of derivatives, for example. But I think I've made the point.Bill Clinton's friendship is not anything any respectable progressive should want.

  8. Dale, I share your antipathy for Bill Clinton. So to be fair to Professor Eisner: Professor Kelton did not claim that Clinton was a GOOD student, nor as good a friend to Eisner as Eisner may have been to him. Principled differences between friends are what make civil wars possible, after all. Excellent clarification of what separates MMT from Baker's analysis.

  9. This comment has been removed by the author.

  10. Sorry — previous comment had a typo.For the record — Eisner spoke at a Post Keynesian conference in Knoxville, TN when Clinton was president. He told the audience that he had recently visited the White House (invited by his former student). Eisner said he was asked (by the president) to comment on his economic policies, and Eisner told Clinton that he was "dead wrong" on Social Security. "I know, Bob," the president said, "But you've gotta understand — this is politics." There are many grounds upon which to criticize Bill Clinton (I was never a fan). This is but one.

  11. Our goal should be to turn "Dang it, I PAID INTO IT for 40 years! I deserve to collect now that I'm retiring!" into "Dang it, I WORKED MY TAIL OFF for 40 years! I deserve to collect now that I'm retiring!" as the rationale the average citizen takes towards their Social Security. As an earned benefit our nation gives to its seniors for a lifetime of work and productivity, to ensure they can maintain a basic living standard in their golden years, full stop.

  12. I agree with the previous anonymous poster. Progressives need to reacquaint the public with the concept that Social Security always functions in real time, with currently produced goods and services going to support those who are currently retired. It's a great system, and we shouldn't misrepresent it as some kind of savings plan.

  13. Small business payroll service can minimize the amount of work which has to do as a small business owner. Our time is very valuable we have to focus on our business.

  14. Payroll isn't inexpensive. It is really imperative a business saves money when and where it could. In the event that Payroll is performed in-house, organizations should pay to train payroll staff, in addition spending for the hardware and programs they applied.

  15. 1. I'm with anonymous at 7:11pm and Dan above.2. Ask Dean if it would be easier or harder to cut defense spending (or insert least favorite govt program here) if we pretended we paid for it with a particular tax and that tax was projected to be insufficient at some future date. The fact is that the only reason a cut in SS or Medicare might happen is that a Dem Prez and Senate think they have to in order to "save" the programs. Think either would let the GOP cut SS or Medicare without such a belief that the payroll tax cut pays for them? (OK, Obama might cut it anyway, but Dems in Senate wouldn't). Think AARP would be acquiescing to cuts if they didn't believe the payroll tax funded SS? The fact of the matter is that far from protecting the programs the payroll tax is solely responsible for any political will that can be mustered to CUT SS and Medicare. Headline progressives need to get a clue.

  16. "From the man himself! What could be more powerful than that proclamation?"You're too kind wh10! Though, from the way you phrased that, some people might take it to mean you were referencing Franklin D. Roosevelt. :o)Ha ha, seriously though, Congress should just turn the payroll tax into an automatic stabilizer by tying it to the unemployment rate. To use a simple formula, floating tax holiday rate as the sum of U3 rate times X (I'll leave it to you economists to come up with the fancy algebra to figure what X should be). If X is, say, 10 then a 9.0% U3 means a 90% cut. Tsy could update it monthly when BLS drops new U3 report (or quarterly to minimize paperwork). On the principal that if you want the Moon you start by asking for the Sun; propose at the same time to "pay for" Medicare for All by uncapping SS FICA and hiking Medicare FICA rate (on both earned and– per Obamacare– unearned income). With a 90% tax holiday, it'd actually be a tax cut."In correspondence with the economist James Meade in 1942 Keynes says he is “converted” to Meade’s idea of altering the social security payroll tax over the business cycle."http://gregmankiw.blogspot.com/2009/02/mature-keynesian-perspective-ii.html

  17. Payrolling businesses will offer you the ability to free up more time and resources completely. This will also eliminate the necessity for you to become an expert on topics such as withholding amounts.Payrolling