Middle Class Welfare And The Payroll Tax Holiday

Part of Pres. Obama’s latest stimulus package involves renewing a payroll tax holiday that was to expire at the end of 2011. Because FICA taxes are one of the few income taxes that most Americans actually pay, the extension is popular and will probably pass Congress in some form. Of course Social Security and Medicare, the programs funded by FICA taxes, are hopelessly insolvent, and the tax holiday only worsens the problem. More telling is that the tax holiday finally debunks the notion that these programs are self-sustaining entitlements; the tax holiday exposes them simply as middle class welfare.

The government goes to great lengths to present Social Security as an earned right, a savings. A government TV ad opens to a young black man walking with an older man, presumably his grandfather. As is very natural on TV, the young man asks what Social Security is. The old man likens the public pension program to planting a tree. When the young man pays his FICA taxes (15.3% of most people’s wages), he is planting a tree that will grow until he retires, and then he can use the value of that tree. Meanwhile, more young workers will plant their own trees, making for a beautiful forest of savings and security. Less metaphorically, every few years, the Social Security administration mails a statement to each taxpayer tallying his contributions and the benefits he has earned so far.

The use of black actors is telling because blacks’ lower life expectancies compared to other races makes the value of their Social Security taxes less than zero – they would on average be better off stuffing their mattresses with cash. Likewise the tree metaphor is a subtle lie. Trees are tangible, practically immoveable, and each one is a discreet asset that cannot be comingled or vanish without a trace. Trees are reliable and keep growing their whole lives. Finally, the Social Security statements suggest that an individual’s benefits are fixed, like money in a savings account; they suggest that the benefits cannot be taken away because they are the property of individual workers.

The government would like people to believe that FICA taxes are more like forced savings and less like a general fund tax. Taxes pay for collective needs such as national defense or roads, while FICA taxes are personal. They are money set aside for the retirement needs of the individuals who pay them; the statements say as much. The TV ads and the statements suggest to the uninformed that these taxes are more like personal savings.

Of course Social Security and Medicare are the biggest lies a government has ever told its people. There are no savings, and there are no reserves. Indeed the programs are underfunded by perhaps $60 trillion. Any savings accounts are illusory, as Congress raided them long ago. Medicare’s costs continue to climb, while the purported insurance premium remains constant. There is no connection between retirement benefits earned and taxes paid. Even worse, no retirement benefits are earned, they are just middle class welfare doled out by unreliable politicians.

Obama has taken the final step toward debunking the personal savings myth of FICA taxes. By wishing to extend the 2011 temporary tax cut, he is using FICA taxes as a political tool to lever his stimulus bill past a skeptical Congress. If FICA taxes are to pay for one’s retirement, then cutting those contributions should also cut future retirement benefits, but that premise has always been a lie.

Social Security and Medicare have always been a ‘pay-as-you-go’ benefits package. There has never been a connection between FICA taxes and retirement benefits. Retirees currently benefit from entitlements set at the whim of Congress, not earned through savings; this is a system of middle class welfare. There is no Constitutional way to constrain future Congresses from altering benefits or eliminating them altogether. The only news is that Obama is no longer working from the ‘plant a tree for a future generation’ script. Like every other tax, FICA is a political tool, and those who were relying on government for their retirements should think again.

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