Friday, March 16, 2012

Federal Budget Deficit Rises With Payroll Tax Cut

I've written several times here at TDS warning about the dire state of the Social Security program and the reckless irresponsibility of President Hopey-Changey in cutting the payroll tax just to give the economy a short term boost and help his reelection chances. My previous writings on the subject are contained here:
Why We’re Screwed (Part 3): The Social Security “Trust Fund” is a Lie (July 13, 2011)

Social Security Blues: 2012 Shaping Up to Be a Third Consecutive Deficit Year (January 14, 2012)
Unfortunately, the lie about the supposed solvency of the Social Security program because trillions of dollars in payroll tax "surpluses" were allegedly squirreled away in the Social Security Trust Fund just won't die easily. If there really is all that money available in the fund, perhaps someone would care to explain away this story that appeared Tuesday in the USA Today:
The payroll tax cut recently enacted by Congress and signed by President Obama will increase the federal budget deficit this year, the Congressional Budget Office says.

What's more, the deficit is likely to be a little deeper than estimated in 2013 and 2014 as well.

The agency's latest report, which updates its forecast from January, shows a likely deficit this year of $1.2 trillion, rather than the $1.1 trillion originally projected. It shows the deficit declining to $1 trillion in 2013 and $953 billion in 2014, both a bit higher than January's forecasts.

Those gloomy figures are based on what CBO calls its "alternative fiscal scenario." Its basic projections are much rosier but are based on existing laws, rather than likely changes.

Because Congress and the White House are almost certain to extend expiring tax cuts and avoid Medicare payment cuts to doctors, for instance, the alternative scenario becomes more likely.

Most of the changes in the report are due to the extension of the 2-percentage-point payroll tax cut through the end of this year.
You really don't have to be a genius or a savant to figure out that if the Social Security trust fund really existed, then the payroll tax cut would not be adding to the current federal deficit. The sad fact is that your "leaders" used a quarter-century's worth of payroll tax surpluses to hide the true size of the federal deficit during that whole time period. Now the bill is on the table, and the diner has nothing in his pockets but lint and IOUs.

Bonus: "You just sat there taking everything you could never dreamed that one day you might have to pay for it"


  1. The Social Security Administration used the decades of surplus money to buy U.S. Treasury Bonds. They are backed by the full faith and credit of the U.S government. We must raise revenue, i.e. taxes, to repay the bondholders (the trust fund). If we say (like Senator Simpson advocates) that they are just worthless IOU's, then you have to explain why we are choosing to honor the debts to China and Japan but repudiating the debts to our own people. I want to hear someone make this argument.

    1. The problem is that if the USG defaults on ANY bond, doesn't matter whether it is held by China, Japan, the Federal Reserve or grandma, its ability to continue to borrow will instantly implode. That will slash federal spending by at least 40% overnight (as that is approximately how much we are borrowing these days). The financial markets, which are being greatly propped up by the deficit spending, would also crash hard and a financial panic would likely ensue.

      In short, we would then have MUCH bigger problems than whether the SS program is still solvent.

    2. But the serious people in Washington have two categories of USG debt: those that cannot be defaulted on, and those which we just "owe to ourselves" (the SS trust fund) which are therefore just accounting entries and can be ignored with impunity. Refusing to fund promised benefits without a "fix" is, in effect, acknowledging default on that debt, but the financial markets will not treat it as such. I would just like to force government poohbahs to own up to this treachery and deceit.

  2. Thanks for the music - it's new to me...

  3. The reason it is adding to the current deficit is that the money lost to the Social Security Trust Fund due to the payroll tax cut is being made up out of current accounts. See the text of the statute in the notes to 26 U.S.C. 1401.