FICA tax cuts? First, the 2% payroll tax holiday for employees is not a real cut. It is an unfunded stimulus for the USG. Under the law, the USG must make up the lost revenue to the SSTF by reimbursing the SSTF in the amount of the loss by issuing non-market T-bills (IOUs) and depositing them into the SSTF.
Second, SS has been running in the red since 2010. The shortfall must be made up by cashing in some of the IOUs in the SSTF. The money comes from the General Fund to redeem them. 42 cents of every federal dollar spent is borrowed so we are borrowing money to pay for SS benefits. The payroll tax holiday increases the shortfall (revenue collected versus benefits paid), which means that we must borrow more money to make up a larger shortfall. Here is some data from the first payroll tax holiday.
We’ll start with the basic numbers. The nonpartisan Congressional Budget Office issued its most recent projections for Social Security’s income and outgo Jan. 26, along with its twice-yearly “Budget and Economic Outlook.” What those numbers show is that Social Security ran a $37 billion deficit last year, is projected to run a $45 billion deficit this year, and more red ink every year thereafter.
Source: CBO “Combined OASDI Trust Funds; January 2011 Baseline” 26 Jan 2011. Note: See “Primary Surplus” line (which is negative, indicating a deficit)
Matters are even worse than this chart shows. In December, Congress passed a Social Security tax reduction. Workers are temporarily paying 2 percentage points less, from 6.2 percent to 4.2 percent, in Social Security payroll taxes this calendar year. Since the government is making up the shortfall out of general revenues, CBO’s deficit projections for the trust funds do not include that. But CBO’s figures predict that the “payroll tax holiday” will cost the government’s general fund $85 billion in this fiscal year and $29 billion in fiscal year 2012 (which starts Oct.1, 2011.) Since every dollar of that will have to be borrowed, the combined effect of the ” tax holiday” and the annual deficits will amount to a $130 billion addition to the federal deficit in the current fiscal year, and $59 billion in fiscal 2012.
Social Security has passed a tipping point. For years it generated more revenue than it consumed, holding down the overall federal deficit and allowing Congress to spend more freely for other things. But those days are gone. Rather than lessening the federal deficit, Social Security has at last — as long predicted — become a drag on the government’s overall finances.
As recently as October, CBO was projecting that it would be 2016 before outlays regularly exceed revenues. But Social Security’s fiscal troubles are more severe than was thought, and the latest projections show the permanent deficits started several years ahead of earlier predictions.
Don’t be confused by the fact that the trust funds are projected to continue growing for several more years. That’s because Treasury must still credit interest payments to the funds on the borrowings from earlier years. But unless taxes are increased or other spending is cut severely, the government will have to borrow from the public to pay the interest that it owes to the trust funds.
I wish the Reps would tell the truth about the "FICA tax cuts" that are adding to our deficits and debt. We are borrowing money to pay benefits with or without these "cuts," and the tax holiday is making matters worse. The hard truth is that the "FICA tax cut" is just more government stimulus spending cloaked in the guise of a tax cut. There is no free lunch.