We are likely to see President Obama make a request to extend the Social Security payroll tax holiday for another year as part of his Jobs speech next week. This tax cut was enacted for 2011 to put more money into the pockets of consumers to stimulate the economy. It reduces the 6.2% employee social security tax to 4.2%. It came at a cost of $112 billion in lost tax revenues.
It also came at a time when Social Security payments were already projected to be $46 billion more than revenues collected for the year. Therefore, instead of Social Security falling short by $46 billion, it actually pushed the Social Security shortfall to $158 billion for the year. Where did that money come from? More borrowed money that got added to the national debt.
It now appears that President Obama wants to do it again. Would you expect anything else? After all, it is an election year and the hope and change speech from last time is not likely to get him re-elected. Why not spend money we don't have, instead?
I just don't understand how we continue to think we can borrow our way to prosperity. This is especially true when the borrowing is not spent on anything of long-term tangible value. Spreading money around in the economy for people to buy goods manufactured in China or oil from Saudi Arabia does what for us? It is like putting a vacation on your credit card. You get a short term boost but you end up with the bill (and interest) and you have nothing more to your name to pay the bill than you had before.
It makes even less sense when it is considered that the Budget Super Committee is about to begin what will probably be very contentious discussions to try to find between $1.2 and $1.5 trillion in in deficit reduction over the next 10 years. At the same time, an extension of the payroll tax holiday will increase the deficit in one year equal to about 10% of what they are trying to cut. If Congress enacts the extension it is like they are trying to dig a hole during the day and they are filling it the same night.
When I speak on personal finance I always make a distinction between good debt and bad debt. Most debt is bad for individuals if it is used to buy things. Most things are here today and gone tomorrow. Cars, clothes, couches, crab legs and cat nip. Depreciating assets, if you can even call them assets.
There is good debt. If you borrow to buy an appreciating asset you have the opportunity to use leverage for your benefit. Mortgage debt on the purchase of a primary residence has historically been a good use of debt. However, the last few years have shown that caution is necessary even with housing if prices are too high. Education is another area where debt can make sense. There is a strong correlation between higher education and higher incomes. Taking on debt to further your education can be a sound investment. Again, there are no absolutes. Look no further than the number of law school graduates today without good job prospects in this economy and a load of student debt.
I am a strong believer in governmental infrastructure investment. Roads, bridges, interstate highways, airports, energy and other assets that help to facilitate commerce. Using debt to develop these assets provides you the ability to develop a future steam of commerce and the resultant income and taxes to pay the debt. This is similar to the thinking of the public works projects during the New Deal. Many of those projects are still in use today. They paid for themselves over time...and more. Compare that thinking with a plan that raids Social Security and effectively throws the money in the air with no idea where it will come down.
$112 billion is a lot of money. For example, the Hoover Dam would cost about $600 million to build today (it cost about $50 million when it was built in the 1930's). We could build almost 166 Hoover Dams with that amount of money. Georgia Power has 2 nuclear power plants under construction for a budgeted cost of $14 billion. You could build 16 of these plants with that much money. The entire interstate highway system of nearly 50,000 miles was constructed for $425 billion (in 2006 dollars). If we assume that cost in today's dollars would be about $500 billion, we could increase the interstate system by almost 25% for $112 billon.
Now compare those numbers with the $814 billion Obama stimulus law passed shortly after he took office in 2009. How much could we have done with that money if had been used strategically. What do we have to show for it ? It is hard to see any tangible effects beyond the debt we now have to pay back. Compared to where we were when it was passed, unemployment is higher, energy prices are higher and our deficit is larger.
The reality is that the Social Security tax holiday will probably be extended. There is not much political will in Washington to keep it from happening. There are too many politicians worried about their re-election rather than resurrecting the country. This tax holiday is likely to end up like most government holidays. Not much work gets done of value. This is not likely to work to do anything but increase our debt.
What should happen? We shouldn't do it. We can't afford it and we certainly should not be short changing Social Security when it already can't cover its current bills. If we really believe that this is important to the economy then we should cut something else in the budget to pay for it. Even better, if we believe that it is important to get $112 billion into the economy, let's make some investments today rather than just setting our children up to a lifetime of paying interest on our debt.
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