Social Security Adds To The Deficit Every Year

by JoeTheEconomist October 22, 2011 6:26 AM

One of the talking points in DC today says that Social Security has not added one penny to the federal government’s  budget deficit.  In its most extreme form, you will hear that Social Security has actually reduced the deficit.  When you hear it, keep one fact in mind: in politics, the number of beans is never as important as how you count them.

Only in DC can you spend ½ a trillion dollar every year, and it is not part of your deficit.  Better yet, only in DC can you spend ½ a trillion dollars every year, and it cuts your deficit.  It is like when I tell my wife that the cheese cake I am eating actually burns calories as I move the fork to my mouth.  Yes, it is absurd.

The politicians say it because voters want to hear it, just like you want to hear about a weight control program that consists of cheese cake.  In the minds of these politicians, Social Security is a closed system which operates in a world in which people like taxes.  In such a world, Social Security would not contribute to the deficit.

The problem is of course that Social Security is not a closed system and people do not like taxes.  Payroll taxes affect jobs.  In fact, they kill jobs.  According to the Congressional Budget Office, lowering payroll taxes from 15.3% to 13.3% will create as many as 7 million jobs.   Social Security portion of payroll taxes is 10.6%, not 2%.  So Social Security costs millions of jobs and billions in income tax revenue.  Of course, in the mind of politicians, Social Security taxes do not affect jobs.

Payroll taxes increase cost of hiring Americans by 15.3% which makes our goods less competitive in world markets.  In my case, I was a programmer in a world where the government added 15.3% to my labor cost but didn’t add it to imported labor.  Technology is a very labor intensive business.  So a major part of that industry is now offshore.  But in the world of the politicians there are no job losses.

Payroll taxes decrease the incentive to work overtime or work longer in your career.  Payroll taxes reduce your take home pay by 15.3%.  Payroll taxes can reduce your take home by more than $15,000.  In the case of older workers, this cost will have little impact on their benefits.    So many older workers retire early who value their time.   The problem is that this group is apt to be concentrated in high-income earners who would be paying income taxes.  But in the world of the politicians, no one retires early.

Payroll taxes also affect income taxes.  As payroll taxes go up, income taxes have to come down, unless people like taxes.  There is a maximum amount of taxation that the economy can carry.  When one tax goes up, others have to come down in order to maintain the balance.  Historically 19.5% of GDP is roughly the maximum.  When payroll taxes are 15.3%, it leaves very little left over to collect for low-wage workers to pay income taxes.  This is why people who earn the top 51% American households have no income tax obligation.  Basically we are paying into our retirement accounts, and putting the rest of the government on the credit card.  I am not sure how that doesn’t add to the deficit in the minds of politicians. 

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Deficit