More on “the Wall” Between Social Security and the General Fund

In a recent post, I expressed some skepticism concerning Charles Blahous' argument that breaching the wall between the Social Security trust funds and the General fund would mean "the end of Social Security as we know it." Since I wrote that post, it occurred to me that the wall is currently being breached.

For 2011, the Social Security tax on employees has been reduced from 6.2% to 4.2%. (Self-employed individuals also benefit from this reduction.) The General Fund is making the Social Security Trust funds whole. While this last fact has been kept relatively quiet, it is interesting that there has been no hue and cry that this is the end of Social Security as we know it.

To be fair though, Charles Blahous has been consistent on this issue. He points me to an article he wrote last December criticizing this fund transfer. In that piece, he concludes: "These gimmicks embody a huge gamble with the future of Social Security. Millions of baby boomers will eventually be expecting benefits that they will believe they paid for via their payroll tax contributions. Increasingly, we are laying a foundation for future taxpayers to say – and rightly – "No, you didn't." He is right that this argument will be made by those who want to cut Social Security benefits if there are continued accounting gimmicks. On this issue, though, I just see the politics as playing out differently, especially since baby boomers vote and older voters have higher participation rates.

What the temporary reduction in the FICA tax does show is that legislators know that it is a bad tax. It is a direct tax on employment, and, as many like to say, if you tax something you will get less of it. It is also a regressive tax. I do, though, have some doubt that a temporary reduction in the FICA tax will have much effect.