President Obama and Senator Reid are proposing to extend the payroll tax holiday. Payroll taxes are Social Security’s only source of revenue. They say they are going to “pay for” the extension with a millionaire surtax. Here are the problems:
- Nothing our government does is “paid for.” After this plan is passed, the U.S. will still be borrowing 40 cents of every dollar we spend. Only after our budget is balanced can they claim something is “paid for.”
- With this policy, the Obama Administration is shifting Social Security from an independent retirement program funded by payroll taxes to a wealth transfer program funded by the general revenue of the United States.
- Social Security has $6.5 trillion worth of unfunded obligations over the next 75 years. Instead of fixing Social Security, the proposed plan sets the precedent for using general revenues to pay for the long term unfunded obligations of Social Security.
- Unfortunately, Congress is already indirectly funding Social Security with general revenue since it has borrowed and spent all the money in the Social Security Trust Fund.
A payroll tax cut makes a bad problem worse. Once politicians officially decide that Social Security will be funded by general revenue, they will move the burden to future generations. Today, the older generation is paid by the younger generation. Tomorrow, the older generation will be paid by generations that are yet to exist. This will be done through the issuance of debt. Of course, nobody will buy our debt (lend our government money), so the Fed will create new money and lend it to the Treasury (quantitative easing). The U.S. Dollar will continue to be diluted and weaken while capital flows to countries with more stable fiscal and monetary policies. Without capital formation in the U.S., companies will not grow or be created and joblessness will mount. Our future generations will pay the price.
These problems can be averted by sound fiscal policies. We cannot let politicians play around the edges while our country faces serious fiscal problems.