President Obama introduced a Jobs bill last night before a joint session of congress. There were some solid proposals included, but I want to extend an analysis from last year's decision to cut payroll taxes for workers. (President Obama's secret plan to Privatize Social Security - Extra credit points available for the first reader to identify the reference.)
In December, I pointed out that workers would need to save their 2% tax cuts under the principle that you don't get something for nothing. In many ways, economics can be a zero sum game, and if the government gives you a 2% tax cut, that will reduce their ability to provide you with benefits by at least 2%... so no matter which pocket the government says is absorbing the 2% tax cut, all the pockets are connected and the tax revenue is simply not going into the government, making it much more difficult for it to come out.
Recall, prior to these proposed changes, workers paid 6.2% of their income into Social Security, and employers matched that with another 6.2%. Now, the President would like to give workers another 1.1% off their Social Security contributions (down to 3.1%) - but he also wants to cut employers' contribution to 3.1%. As I pointed out last year, the cuts took the already underfunded Social Security contributions down from 100% to 84%, this latest "stimulus" will take contributions down to 50%.
What does this mean for the responsible wage earner? Well, it's a challenge. You see, the first 2% cut was simply a matter of the responsible wage earner deciding to save the 2% - it was essentially a privatization opportunity for workers. Take 2% of your pay, save it on your own, and hope that your savings out-earn the Social Security trust fund. But this year's cut poses a bigger problem for workers:
If this provision passes, your retirement contributions are being cut 4.2%, but you'll only be getting 1.1% of that in your pocket. Your employer will be allowed to pocket the other 3.1%! The responsible wage earner, who wants to continue saving toward their retirement target will now have to find another 3.1% of their income to stay the course - It's as if the President just decided he would like to hand out a 3.1% pay cut to all wage earners, and instead give that money to employers.
As a responsible wage earner - and someone who knows a bit more about personal finance than the average bear - I'm fine receiving up to my entire 6.2% personal contribution in a payroll tax cut. I'll save the money, but I protest allowing my employers to shortchange my Social Security contributions while allowing them to pocket the money. This is a step backwards in the current effort to close the income distribution gap, and workers across the country should insist that employers continue to fully fund their share of Social Security contributions.
