Monday, December 10, 2007

The TRUE significance of the S.S. Trust Fund (TAP)

When S.S. retirement benefit payouts finally fall short of payroll tax (FICA) receipts (at some point in the next decade?), the only significance of the Trust Fund will be to signal a hike in the income tax to cash the pile of "government owned" bonds that have been built up over time to "cover" said shortfall -- in place of simply raising the payroll tax a bit to cover the benefit gap, as we always did before.

Without the Trust Fund bonds to cash, we would be forced to raise the payroll tax about 1/10 of a point a year -- as average income grows 1-1/2 percent per year -- to maintain the going benefit level (until near mid-century when the retired population is predicted to stop increasing relative to overall population).

Whatever payment method to cover our pay-as-you-go retirement system -- and the present double-trouble arrangement looks clunkier and clunkier as the time to invoke it's clunkiness comes nearer -- we have to raise SOME tax the SAME overall amount to keep paying-as-we-go -- until retiree population finally fills out.

PS. It is entirely possible (even likely?) that, when the FICA gap that is supposed to trigger cashing Trust Fund bonds (w/income tax) finally hits, we may opt instead to run up even more (?) income tax debt (by selling new bonds to private -- i.e., real) owners -- thereby leaving even more debt for our great, great, great, great grandchildren to pay off , in this case to cover the retirement of their long deceased great, great, grandparents. That is the alternate (likely?) significance of the Trust Fund.

Addendum: it has occurred to me that the best way to return to normal S.S. funding (all FICA) would be to pay down the Trust Fund until there was about a 5 year bridge left (a bridge to cover any temporary shortfall in the FICA stream while Congress gets around to hiking FICA -- the only sensible rationale for a trust fund) -- at the point we see the bridge-point coming, we can begin to phase (rather than one-jump) income tax out and FICA in.


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