Friday, November 30, 2012
The 1983 Social Security retirement tax deal accomplished an all-critical benefit for one group of people: politicians
The 1983 Social Security retirement tax deal accomplished an all-critical benefit for one group of people: politicians. By setting the payroll tax much higher than needed to meet current outgo they avoided cyclically facing the unpopular need to raise payroll taxes to keep up income with growing outgo -- indeed they postponed the (their) need for many decades.
The screwy unfortunate effect has been to pay for regular budget items (army, navy and USDA) with the (flat) payroll tax (with a cap to boot) in the beginning and, then, to pay retirees income in the out decades partially with (progressive) income tax -- then paying about 25% of the retirees needs.
The treasury sells the bonds and then uses the money to pay for regular budget items -- so you can take your choice about whether the trust fund is make-believe; the money is not put aside for later.
This was doubly dumb if we consider that growth in productivity means that the non-progressive flat tax as levied in a less productive era when payers could least afford it and the progressive tax will phase in when payers can most afford to cough up.
When the fund finally runs out the tax collection method would logically revert back to 100% payroll tax support of retirees (not 75/25). Maybe they will start another (make-believe?) trust fund to avoid that (and avoid cyclical tax raises too :-]).
BTW, average income doubles about twice as fast as population size so there should be no fundamental problem paying for retirees -- even when workers to retirees ratio drops to 2 to 1 -- and never go lower -- after 2050.