President Obama and the United States Congress have deceived the general public by using recent payroll tax-cuts as a device to renege on the Social Security Contract carefully orchestrated by the FDR administration during the late 1930s. Embedded in the fine print of the so-called stimulus package is a provision to transfer more than $215 billion in general tax revenues into the Social Security Trust Fund to compensate for the reduction in payroll tax revenue. This constitutes a fundamental breach of contract with the American people.
Let me explain. Social Security, from its inception, has been financed through a separate payroll tax levied on covered workers. Its finances are tracked through a separate Trust Fund system, distinct from the general federal budget. This separation was designed to distinguish the Social Security program from welfare programs, where benefits are assessed on the basis of identified need, and where contributions are based on ability to pay.
Social Security was designed so that all workers – rich as well as poor – would pay payroll taxes at the same rate up to a maximum income ceiling. Benefits received would be based on the amount that each individual paid into the system over a lifetime of work, prior to a designated age of access to the pension scheme. A higher wage earner, in this way, would pay more into the system, and receive more in benefits.
Note that the Social Security system, from the overall perspective of taxes and benefits is a progressive system. Lower income workers receive disproportionately higher benefits. Higher income workers receive no benefits from earnings above the maximum income cut-off for the payroll tax.
President Obama and the Congress have now moved surreptitiously to turn the system into a welfare program, and to render it far more progressive, by deploying the income tax instead of the payroll tax. By subsidizing payments with income taxes, they have terminated the contract that Social Security benefits are fully earned by the recipients.
According to Charles Blahous, this breach of contract is no accident. It is the result of a fundamental change of philosophy driven by Liberal Democrat policy advocates over the past decade.
“As their stated concerns about general income inequality grew, there came a proliferation of proposals to replace Social Security’s ‘regressive’ payroll tax financing with income generated from progressive income taxes. The partial conversion last year of Social Security to income-tax financing represents a first concrete step in executing the change…The idea that higher-income Americans should begin to subsidize Social Security – and for the first time, receive no benefits for those added contributions – gained significant momentum among left-of- center policy advocates in the decade after President Clinton first proposed it. Noted economists Peter Diamond and Peter Orszag proposed in 2003 that a Social Security ‘legacy tax’ be imposed on earnings above the taxable wage base, thereby ensuring that very high earners contribute to financing the legacy debt in proportion their earnings. No benefit credits were to be allocated based on this additional 3 percent ’legacy tax’.” Charles Blahous, ‘The Dark Side of the Payroll Tax Cut’, Defining Ideas, February 24, 2012
Unless this sleight of hand is exposed and quickly reversed, readers of this column who pay income taxes should brace themselves for the substantial new taxes that they will soon be paying to bail out a Social Security system whose cupboard is already bare – a Ponzi Scheme whose Trust Fund is full of Treasury IOUs instead of invested monies from past payroll taxes.
The politics of entitlement is very ugly. Politicians simply cannot keep their thieving hands out of an apparently limitless money jar. Addicted as they are to the jar’s contents, they ruthlessly renege on contracts when the jar runs empty.
And of course, politicians are above the law. They cannot be sued in the courts for breach of the Social Security contract.