Secretary Reich, and I call you that because that made you ex officio a Trustee of Social Security, with all respect this is one of the stupidest suggestions I ever heard.Either Social Security is in some sort of existential crisis or it is not. If it is the last thing you want to do is blow a big hole in its current income stream, and even if it isn't in crisis as a whole it is entering a period when it needs cash dollars. As noted above sometime soon income extracted in the form of payroll taxes and taxes on upper income benefits will no longer cover outlays. This will start as short term event in 2009 and 2010 but will return sometime after 2013 or so. This is not a problem it was exactly to counter the short term events that caused Congress to mandate that Social Security maintain a one year reserve right from the beginning. Right now those reserves are sitting right at 3 1/2 years, plenty to handle a cash shortfall that will be something less than 1% of outlays.
"(2) Propose a one-year payroll tax holiday on the first $20,000 of income. "
As you must be aware actual Social Security income from payroll tax and tax on benefits will barely cover outlays in OAS this year, while DI went cash flow negative in 2006. The two Trust Funds still show surpluses simply because of interest accrued on the Special Treasuries, but this interest has not come in the form of cash, but instead in the form of more Special Treasuries. Now these Special Treasuries are backed by Full Faith and Credit of the U.S. but can only be redeemed in cash by the Treasury doing borrowing in the public markets dollar for dollar.
What this means is that every 95%+ of every payroll tax dollar that comes in the door goes out immediately out in the form of benefits. Which means that every dollar not collected because of a tax holiday has to be replaced by a dollar of public borrowing and has the effect of flatlining the growth of the Trust Fund and so making a phony Social Security crisis into a real one.
Every time I hear of a 'temporary' payroll tax holiday I want to tear my hair out. The reason they are embraced by Blue Dogs and Republicans is because they make it easier to achieve their long term goal of rolling back the New Deal by 'proving' Social Security is a 'failure'.
Social Security is not a regressive tax, not when you consider the system as a whole. And Social Security was designed specifically NOT to be a welfare system lest it gets caught up in exactly the kind of proposals you are putting forth here.
Leave Social Security alone. It is worker insurance paid entirely by workers for workers. It demands nothing from capital and so owes nothing to capital. No one gets a free ride although there is a mild transfer from the middle class to the working class (because most people making $102,000 or less know they could easily have ended up closer to the bottom).
Under your proposal would workers still get credit for these dollars not withheld? Or would their future retirement simply be permanently reduced? These proposals always seem easy. Regressive carbon tax? Reduce payroll tax to compensate. Regressive flat tax? Reduce payroll tax to compensate. But each and every proposal has the effect, and often the intent, of defunding Social Security and transforming it from insurance to welfare.
Mr. Secretary do you have trouble sleeping at night? It is probably the ghost of Frances Perkins haunting you for even thinking about helping those who would kill her brainchild.
On the other hand even a short term payroll tax holiday blows a big hole in the Trust Fund. I don't know how much of SS tax income comes from the first $20,000 of income, but surely it is more than the $110 billion or so in interest on the existing Trust Fund, interest that will have to be paid by money borrowed on the public markets, there not being any free lunch here. Every $100 billion not collected in the present cuts $200 billion or more off the Trust Fund projected peak total. Good for Biggs' 'sustained solvency', not so good for the long term interests of workers.
Social Security is NOT welfare. Until you start exempting the first five, ten, or twenty thousand of income. For the love of FDR and Francis Perkins (the Labor Secretary who oversaw implementation of SS) resist the temptation to show how progressive you are by screwing around with FICA taxes. The wall between Social Security was carefully constructed for a particular purpose, it holds back those who would destroy Social Security in the name of 'fiscal responsibility' and 'intergenerational equity'.
Payroll tax holiday = defund Social Security. No matter how reasonable it sounds to offset some proposed regressive tax by a cut in payroll tax you always have to keep this equation in mind. You are not doing the poor any favors no matter how regressive you might think FICA is in theory. In practice it isn't. Just leave it alone.