Paycheck cash advance

Paycheck politics

Just when it seemed this year's budget debate would hinge largely on a fight over capital-gains taxes, a free-for-all over Social Security levies has blown the battle wide open. The proposal by Senator Daniel Patrick Moynihan to slash payroll taxes for 132 million workers has reopened old wounds from earlier wars over the sacrosanct Social Security system. But while those struggles were aimed at winning the hearts and minds of America's elderly, the coming clash over Moynihan's bomb-shell will center on two other giant constituencies: America's work force and the mammoth baby-boom generation. The fight could change the face of U.S. fiscal policy for years to come.

Moynihan's plan would end the build-up of surpluses in Social Security's trust funds to help pay for the retirement of the baby boom--a strategy the New York Democrat had long favored--and call a halt to government's looting of those reserves to help finance other spending. In fiscal 1991 alone, workers would get a tax cut equal to $55 billion and would be spared billions of dollars more in taxes in years hence. Unless offset by other tax hikes or deep budget cuts, this huge tax cut would widen the federal budget deficit; some analysts warned that it could cause economic havoc, fueling inflation and focusing the Federal Reserve into a dangerous round of money tightening. To forestall disaster, George Bush could be forced to agree to deeper defense cuts and much forsworn new taxes, or reach a compromise to carry out long-term deficit cutting to protect the Social Security reserves. Without such a deal, even Bush's cherished capital-gains-tax cut seems endangered. "How can the President claim Moynihan's tax cut is bad because it goes for workers, but his own tax cut is good because it goes for capitalists?" asks Brookings Institution economist Barry Bosworth.

The issues raised by Moynihan could als prompt a serious look at the trend to finance growing shares of government spending through regressive payroll taxes on workers. For the past five decades, the payroll tax has followed what economist Eugene Steurele calls "a simple rule of thumb," rising 3 percentage points each decade, to its current level of 15.3 percent. Counting employers' share of the payroll tax--which economicsts assume workers actually bear in the form of reduced wages--3 out of 4 Americans now pay more in taxes to finance Social Security and medicare than they pay in income taxes. Because the tax largely exempts fringe benefits, it may also discriminate against part-time workers, women and minorities, who tend to earn most of their compensation in cash. As Congress probes these inequities in the coming months, sweeping changes to spread the burden of payroll taxes could lie ahead.

Scare tactics. Even before lawmakers returned to Washington from their extended holiday recess, it was clear that Moynihan's plan held the power to reshape old political fault lines. Bush called the proposal a "charade," then fell back on old scare tactics, suggesting--falsely--that Moynihan's plan would lead to cutbacks in benefits affecting "the older people in this country." While Democratic congressional leaders were still pondering their position, some key legislators in both parties also joined Bush in denouncing the plan. "The decision to put something aside for the babyboomers was probably the only act of fiscal responsibility during the Reagan years, so repealing it would make the record perfect," snorted Representative Andy Jacobs (D-Ind.), who chairs a House subcommittee on Social Security. Senator John Heinz (R-Pa.) warned that Moynihan's changes would "undermine people's confidence and risk the soundness of the Social Security system."

But other lawmakers heartily endorsed Moynihan's plan. Some Democrats crowed that it would shore up the party's support among younger workers, and may Republicans voiced their approval as well. Indeed, it appeared that "the only constituency against this thing is absolutely inside the Beltway," said former Senate Budget Committee staffer Steve Bell. Lining up in favor were conservative tax-cut enthusiasts, small businesses hard hit by the payroll tax and groups skeptical that the government could keep its hands off the reserves, such as the nascent 1,000-member American Association of Boomers and even the vocal senior citizens' group, the National Committee to Preserve Social Security and Medicare. The potent American Association of Retired Persons was reserving judgment until it heard more details of Moynihan's plan.

Despite its official opposition, moreover, even the White House was divided internally over the substance of the senator's proposal. While Budget Director Richard Darman had so far won the argument against it, sources said there was keen interest in a big tax cut among supply-siders and conservatives like White House Chief of Staff John Sununu. Behind closed doors, "there's a lot of mixed feelings" about the Moynihan plan, acknowledges one White House aide.

For staunch Social Security defender Moynihan, who just a year ago termed the system's growing reserves America's key to "a very bright future," the proposal represented a change of heart born of desperation. For years, Social Security had operated more or less on a pay-as-you-go basis, collecting just about enough in payroll taxes each year to pay benefits to current retirees. But with the program facing insolvency in 1977 and again in 1983, Moynihan and other legislators pushed up payroll-tax rates and nudged the system in the direction of a pension fund, in which resources to pay out future benefits are built up well in advance. The move was prompted by a grim demographic reckoning: An estimated 70 million babyboomers faced retirement beginning about 2010, even as the ratio of future workers to retirees was destined to slump sharply. IT seemed questionable that tomorrow's shrunken work force could tolerate the steep payroll taxes needed to fund a pay-as-you-go system.

Big IOU's. The resulting decision to pre-fund partially the baby-boomers' benefits was based on elegant economic theory. As payroll taxes rolled in, the growing reserves would be invested in special Treasury bonds, or government IOU's, effectively cutting the outstanding national debt. In effect, the reserves would amount to a form of national savings, freeing up other private capital for companies to borrow in order to invest in new plants and technology. That new equipment would help raise workers' productivity and along with it their wages. When it came time for government to pay back the IOU's so that boomers could get their benefits, the 21st-century work force would be so well off that it could readily bear large payroll levies or hefty income taxes.

The government raid. Ever since the adoption of the prefunding plan, economists have debated its merits with the intensity of Talmudic scholars. Many have argued that the growing reserves would prove a tempting target for a raid, prompting today's retirees to demand more-generous benefits now at the expense of the baby boom's. But so far, the only raider around has been the spendthrift federal government. Because Congress voted to count each year's Social Security surplus toward the deficit targets of the Gramm-Rudman law, the reserves actually offset a growing portion of the government's ballooning operating deficit. Last year, for example, the $52 billion Social Security surplus helped mask a large part of the $204 billion deficit in the operating budget. Rather than being used to buy down the national debt and raise national saving, Social Security's cumulative surpluses are effectively being "borrowed" to finance other federal spending.

Moynihan, Heinz and other legislators fought hard last year to strip the reserves out of the Gramm-Rudman calculations and force deeper cuts in the operating deficit. When that effort failed, a disgusted Moynihan turned to a pay-as-you-go plan advocated by former Social Security chief actuary Robert Myers. Under the proposal, benefits for today's and tomorrow's retirees would remain at their currently scheduled levels. But instead of holding steady for the foreseeable future, payroll-tax rates would fall in 1990 and 1991, stay level for the next 25 years and then rise sharply again after 201.5. In effect, today's workers would get a tax cut, while tomorrow's workers would pay higher taxes to support baby-boomers when they retire. The reserves would grow only to the point where they constituted a contingency fund to weather recessions equal to about one year's benefits.