It's Not Nice to Fool Social Security

     The good news:  In 2012 senior citizens will receive a Social Security cost of living adjustment, banking bigger payments for the first time since 2009. The increase for retirees is slated to be 3.6%, or an average of $43 more per month.

     The bad news: There's no way the government is paying for it, except to add it to our credit card bill.

     Up until this year, the payroll tax -- which pays for Social Security -- sliced off 12.4% from the first $106,800 of an individual's salary. Income above $106,800 was exempt from Social Security tax. (There's an additional tax to help pay for Medicare, which brings the total payroll tax up to 15% for most workers.) Half of the Social Security tax, or 6.2%, was paid by the employer, the other half by the worker.

     For 2011, President Obama and Congress got together and passed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. (Snappy title, isn't it?) The act lowered the worker's part of the payroll tax from 6.2% to 4.2%. The objective was to put more money into people's pockets, and hope they would spend it to spur our faltering economy. No one knows for sure if this strategy has worked. Democrats argue yes; Republicans argue no. But it's hard to believe that it didn't have some impact on the economy. The tax reduction left average American families almost $100 a month more in their paychecks. And you know, most of them spent it.

     The Administration hoped that lowering the payroll tax would help the economy. But it also recognized the lower tax would take funds away from Social Security -- to the tune of about $120 billion for the year -- and Social Security is already paying out more than it takes in via the payroll tax. So the Tax Relief act was voted in for only one year, as a temporary measure. In the meantime, the missing payments to Social Security would be made out of general government funds ... meaning the government would borrow more money to pay into the Social Security system.

     On January 1, 2012, the temporary tax reduction is scheduled to expire. President Obama and the Democrats are worried that bumping the payroll tax back up from 4.2% to 6.2% will hurt the economy -- and will be seen by voters as a tax increase. So they're pushing not only  to keep the lower tax rate, but lower it further, to 3.1%. That will let workers take home still more money, about $500 per year per family. It will, theoretically, allow consumers to buy more products and help the economy. But that's yet another $500 a year denied the Social Security fund -- to be made up by the government borrowing yet more money.

     In the meantime, the amount of salary subject to the payroll tax is inching up from $106,800 to $110,100. Applying the tax to this additional $3,300 will make up for a small portion of the money lost to the tax reduction.

     Most Republicans are against the Obama proposal to lower the payroll tax. Presumably, Republicans are fiscally responsible and do not want to incur more government debt. Besides, they argue, the program hasn't worked, and Social Security is already looking at a huge deficit looming on the horizon as Baby Boomers retire. Lowering the payroll tax will make future deficits even bigger and more unwieldy.

     But, let's face it, many Republicans are philosophically opposed to having the federal government finance people's retirements. They consider it socialism. They want to do away with Social Security entirely, and for better or worse let people manage their own retirement funds.

     Some liberal Democrats have worried that the payroll tax reduction will, in fact, actually undermine Social Security. Up until now, Social Security has paid for itself. People pay into the system, then they take out benefits. It's a retirement program, not a welfare program. But if general government funds start paying for Social Security, the system might get tainted as welfare program and lose the support of young people, the upper middle class -- anyone who pays into the system but won't get anything out of it.

     As a response Senate Majority Leader Harry Reid proposed a new tax on Americans earning more than $1 million a year. It would be a temporary tax, to cover the temporary payroll tax cut. But the proposal doesn't seem to be going anywhere. It's hard to say; the situation is still very fluid.

     Does this temporary payroll tax deduction seem like a good idea to you? Most of us are Social Security recipients. Does it make you feel more comfortable that the government is borrowing more money to pay your monthly benefit?

     Honestly, I can't decide. The economy needs help. So do American families. But it's a dangerous game to starting fooling around with Social Security.

     I, myself, am eligible to collect Social Security. I'm trying to hold out for a couple of years -- to get a bigger benefit when I'm older. But I'm beginning to wonder if that's such a good idea. Maybe I should take the money now ... because in 20 years, when I'm in my 80s, the money might not be there.