As a matter of principle I'm against the latest gimmick to create jobs: paying corporations to hire by "forgiving" them the payment of their contribution to Social Security. (Full disclosure: I have paid into Social Security all my life and am now collecting it.) For many years and through many administrations the government has been raiding the Social Security Trust Fund in order to pay for lots of things that politicians don't want to raise taxes for. (For some background, see the following piece by William Greider from The Nation.) None of the super patriots of either party dare to make the taxpayers actually pony up for ever more costly high-tech wars and the hardware and humans used to fight them. So they, in their wisdom, have been "borrowing" money paid into Social Security, leaving it with trillions in IOUs. The government can not afford to pay these debts, so Social Security is really in the hole through no fault of its own. The PTR -- What part of "beneath contempt" don't you understand? -- has the incredible gall to blame the Social Security program and try to privatize it.
So, in this setting, it is clear that the latest attempt to buy employment by further jeapardizing the Social Security Fund is totally outrageous and cowardly. What should be done -- should have been done years ago -- is to eliminate or partially eliminate the upper income limit at which Social Security payments cut off. This limit I think is $97,500; in otherwords, an individual's income above this amount is not subject to Social Security withholding. There is nothing magical about this number, and raising it enough or eliminating it will keep Social Security solvent for many decades to come.
As I've pointed out before, Social Security is a social compact. The fashionable word these days is to call it an "entitlement". The people who use this word either don't pay attention to the pejorative tone it has taken on, or deliberately welcome this tone. The word has come to be tied to the idea that someone may feel "entitled" to some benefit without, somehow, having worked for it -- sort of like a spoiled kid who feels "entitled" to get his or her way. In fact, Social Security is a wonderful example of inter-generational trust. We don't make our withholding payments to buy our retirement, we make them to help ensure an economically dignified old age for our parents and others of the preceding generation. We do so in the expectation that the succeeding generation -- our children -- will do the same for us. This is not a fanciful interpretation, but is literally the way the law was written.
Nobody dared to pay for the immense bank bailout by borrowing money from Social Security or, heaven forbid, from the military budget. If the President and Congress want to create jobs, let them find the money from general revenues or from the deficit, or, even better, from taxes on corporate bonuses say, or on companies' profits from offshore affiliates.
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Part 1:
ReplyDeleteFirst, I just want to say, I hate the payroll tax. It's a horrible taxation system. It reduces employment, lowers wages, and distorts allocation to payment in benefits. We should completely eject payroll taxation, there are plenty of alternative schemes that can fund a social security and medicare system without so much nasty distortion, and could increase revenues while still putting more money in people's pockets. It would be such a benefit to our economy and low and middle income workers. There is a clear explanation why we don't dispense of the payroll tax system though. The rich love to wrap themselves up in their corporate equity which payroll taxes can't touch. If we ejected payroll taxes the replacement system wouldn't allow them to escape payment by paying themselves in equity. That's why such large amounts of compensation go to equity rather than income in the highest of earners, because they don't want to pay their "fair share" of payroll taxes. Never mind, what I meant to say was - why the hell should the rich have to fund medicare, they are better than the rest of us! It's not only bad economic policy, it's not even fair to the little guys.
Now, in terms of financing social security. I know it's not politically possible to rid ourselves of payroll financing, but it would actually be a good policy for paying for it to remove the exemption. Even Milton Friedman realized that social security's wage base cap was redistributive - that from the poor to the wealthy. I suppose you could argue eliminating the cap would be equivalent to an increase in the effective marginal tax rate and hurt economic growth, but I don't think the behavioral responses are really that strong that the economic growth damage would be substantial enough to make the policy, overall, bad. Also, social security is not in a crisis even if we use the current framework (which, again, I hate). Diamond and Orszag came up with a workable plan, though it can't be implemented within the near future because of the weak recovery. I always thought an interesting way to finance social security would be to put a very, very tiny financial transaction tax in the vein of a Tobin Tax (less than 1% tax on financial transactions could very easily cover the social security shortfall and we could even reduce payroll taxes to increase earnings and unemployment, I worked out the math once but I don't remember the exact numbers). Considering that Wall Street seems to find a way to destroy millions of American's retirement savings every 10 years, perhaps a tiny financial tax to beef up social security benefits for low and middle income workers and cover the short fall of the system would be appropriate.
Part 2:
ReplyDeleteFinally, whether the program will work - unlikely. For one, it's too small. Doing a payroll tax holiday like this is not going to have any substantial impact on unemployment, it's not large enough if the number's I'm hearing are true. Also, there is a good argument that when there is a recession this deep such a slight decrease in employment costs is not enough to offset the substantial drop in aggregate demand, also there are various arguments that have to do with elasticity of labor but I don't want to bother with the explanation for that. This is actually been confirmed in empirical studies of various countries that tried payroll tax cuts in specific regions for new hires, the effects have either been undetectable or so minor that it didn't even matter. And while the U.S. isn't Finland / Denmark / Chile / Sweden - it doesn't give great confidence for the program. A new hire tax credit would have to be quite large to get any noticeable effect on unemployment, a payroll tax holiday for new hires is hardily going to do the trick.
Also, doesn't this create a perverse incentive to fire all the easily replaceable workers (usually low-income) and then re-hire new ones in order to access the payroll tax advantage? Are we really going to have enough structure and monitoring of the system to make sure this doesn't happen in mass? I'm not convinced.
So, essentially, we are decreasing social security revenue to create a program that likely won't do much of anything for unemployment.
PS: The Social Security Wage Base is $106,800 if I remember correctly.
PSS: I also wouldn't raise taxes on corporations right now, we don't want to raise taxes on anybody at the moment (though I wouldn't mind a banker bonus surcharge).