Payroll tax cut conundrum

An issue is before Congress that has both Republicans and Democrats tied up in ideological knots.  Republicans oppose deficit spending.  They also are in favor of tax cuts.  Democrats are usually fine with government spending, which they are willing to finance with higher taxes.  So what do they do about extending the payroll tax cuts?

Part of President Obama’s stimulus package was to cut the amount people have to pay into social security, thus adding some dollars to their paychecks.

Now that provision is expiring, and the Obama administration wants to extend it.  But some Republicans are arguing that social security is already being starved and is headed for bankruptcy.  So it isn’t responsible to just take even more out of social security funding.

So now Democrats, including the President, are accusing Republicans of wanting to increase taxes!

See Republicans split on Democratic plan to extend payroll tax cut – The Washington Post.

What would be the statesman-like thing to do, as opposed to the political-rhetoric thing to do?

More on the great Ponzi scheme

Charles Krauthammer explains in detail why Social Security is indeed a Ponzi scheme, as we discussed here in an earlier post:  “In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants.  This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants.” This is exactly what the pay-as-you-go funding of Social Security involves.

He goes on to say that the mandatory nature of Social Security makes it work longer than the Bernie Madoff schemes.  Then he gives some interesting statistics:

You can force young people into Social Security, but if there just aren’t enough young people in existence to support current beneficiaries, the system will collapse anyway.

When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.

Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent. This is a staggering sum, considering that it is in addition to all the other taxes he pays to sustain other functions of government, such as Medicare, whose costs are exploding.

The Treasury already steps in and borrows the money required to cover the gap between what workers pay into Social Security and what seniors take out. When young people were plentiful, Social Security produced a surplus. Starting now and for decades to come, it will add to the deficit, increasingly so as the population ages.

Demography is destiny.

via A Ponzi scheme that should be fixed – The Washington Post.


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