The 2% payroll tax holiday has been extended for a couple of months, and it will probably be extended for the rest of 2012. I’m guessing a lot of people don’t realize this 2% goes straight to Social Security–no other government spending is involved. Long term, that means Social Security isn’t going to be funded as planned. You can’t keep a pyramid scheme going ad infitum, but this may bring Social Security as we currently know it to an end sooner rather than later.
That may be a really good thing.
The longer people are taking the 2% home, the more difficult it’s going to be to convince them it needs to be withheld later. The longer people keep taking that 2% home, the more likely it is there will be some kind of Social Security reform deal cut to end the tax holday.
Here’s a possibility…
Bush 43 failed at convincing people that Social Security needed to be partially privatized. But how would people feel in 2013 if they were offered the option to save that 2% in a private account when withholding resumes? For those already saving responsibly for their own retirement, there wouldn’t be much resistance. They could break even by reducing their contribution to a qualified plan by the same 2% they’re going to be mandated to save. For those doing nothing currently on their own, they’ll be forced to take some ownership of their future instead of only relying solely on the current Social Security plan. Some may balk at that, but when you tell them they’re going to be taxed an extra 2% either way, they probably won’t complain much.
I’m guessing this would lead to some sort of means testing for Social Security, which we’re probably headed for anyway if we’re honest with ourselves. I’m betting I’ll never see Social Security either way, so I’d happily take the compromise of being guaranteed my 2% private account and having to give up the other 4.2% as a “safety net tax”. Well, “happily” may be a stretch, but 2% is better than getting none of the 6.2% I’ve had taken from me up to now.
Newt Gingrich as suggested something similar, but without the means testing. Instead, he’d guarantee current Social Security benefits as the floor.