New tax law reveals the mirage of the Social Security trust fund
24th December 2010
Let me show you how this works. Next year, as you probably know, workers subject to Social Security taxes will pay only 4.2 percent of their “covered wages” -wages up to $106,800 – rather than the normal 6.2 percent. This will reduce Social Security’s cash proceeds by $112 billion, according to Congress’ Joint Committee on Taxation.
What impact will this cash shortfall have on the Social Security trust fund? None. Zero. Zip.
How can a $112 billion cut in Social Security revenues not affect the trust fund? Because Treasury will give the trust fund the same amount of bonds it would have gotten had the two-percentage-point tax holiday didn’t exist.
In other words, Treasury isn’t selling bonds to Social Security, it is creating them out of thin air and putting them into the trust fund. The missing cash? Uncle Sam will just borrow $112 billion from somewhere.