Wednesday, January 28, 2009

Guest blog: Social Security and the Stimulus Bill

My AEI research assistant Adam Paul provides some details on how the proposed stimulus package would affect Social Security and the Social Security Administration:

As the House prepares to vote on the American Recovery and Reinvestment Act of 2009 (a.k.a the stimulus bill), the Social Security implications of the legislation have been only briefly noted. 

The stimulus bill does provide explicit funding for new initiatives at SSA. These include $900 million in funding to modernize computer facilities and better process disability and retirement applications.  The bill also calls for the Commissioner of SSA to work with Homeland Security to better protect sensitive information and detect fraud.

Yet beyond the technical changes, the bill could also impact Social Security's finances. The current plan, including a Republican-backed measure to provide relief from the Alternative Minimum tax, provides $342 billion in tax cuts. As Bloomberg reported yesterday, much of that money comes from an Obama plan to reduce payroll taxes. The payroll tax reductions come via Obama's Making Work Pay program which provides $500 to individuals and $1,000 to families in tax credits. (Andrew Biggs commented on a formative version of this plan to the WSJ during the campaign). While the rebate comes out of earned income, the credit for each year is set as 6.2 percent of earned income up $8,000. This is exactly the employee share of payroll taxes. Since many Americans already pay no income tax this provision would be a direct return of a portion of their payroll tax. Without transfers of general tax revenues, the provision would undercut Social Security's already dim finances. As the tax cuts are intended to be a boon to the economy, Congress and the administration are hoping that recipients will spend, not save, these rebates to spur demand.

The plan also impacts Social Security by extending the terms for eligibility for the Supplemental Security Income. The program, which is designed for very low-income individuals with limited work histories, contains strict total asset maximums. Anyone exceeding those limits is disqualified. The stimulus package provides a one-time provision that places earners whose eligibility expired in the last two months because they exceeded the income limit back on the program.

The Congressional Budget Office expects that 7.5 million individuals will receive payment immediately, and .3 million later in 2009.  The plan is estimated to increase SSI outlays by $4.1 billion in 2009 and $.1 billion in 2010. The plan is far from a permanent fix for these retirees.

Also click here to see Adam's work on pension reform in Argentina.



Anonymous said...

"Without transfers of general tax revenues, the provision would undercut Social Security's already dim finances." But the money DOES come out of general revenues, right? So that implies that it does NOT "undercut" Social Security. Is that correct?

But then you say, "The plan also impacts Social Security..." If the first provision doesn't affect Social Security, why do you say the plan "also impacts Social Security"? I'm quite confused.

Andrew G. Biggs said...

I think you might want to look at this post ( which gets into things a bit more deeply. The short story, as I understand it, is that payroll taxes are cut but it's "billed" to general revenue. This is equivalent to cutting the payroll tax and then transferring income tax revenues to the trust funds. In other words, confusing.

Adam Paul said...

The stimulus plan has several separate proposals that touch on Social Security. I’ve laid them out separately to be clearer.
1. The stimulus plan provides funding from general revenues for administrative costs. This is a onetime cost.
2. The portion of the plan where I mention general revenues is the tax rebate provision. The provision comes out of a federal income tax liability. For those people with no income tax liability, this is essentially a refund of part of their payroll tax. Yet this reduction does not count against recipients in the calculations of their retirement benefits later in life. This results in the same amount of benefits being paid on less total revenue. The accounting could likely be done such that the full payroll tax is paid and then the refund is out of general revenue, shifting what would accurately be a Social Security shortfall into the federal deficit.
3. The portion of the plan that impacts SSI, where I mention that the plan impacts Social Security, is accounted for in the stimulus bill and should not impact the finances of the program. I simply meant that there is another provision of the plan that touches on Social Security. In this case, the eligibility requirement for the means-tested program is temporarily altered.

MS said...

I understand the argument and it's very compelling.

I think Andrew's point is that the payroll tax cut should not be disguised as another tax cut.

OK, but then, what if the credit for each year were set at 4 percent or 8 percent instead of 6.2? Would that also count as a disguise? In fact, almost any tax cut (or credit) on earnings could be creatively thought as a payroll tax if we think of an unified budget.

It is as confusing as thinking of the "lockbox" where the Social Security surpluses are stored.

Andrew G. Biggs said...

In one sense you're obviously right -- money is fungible. We could do the full Kotlikoff and call Social Security taxes forced loans, etc.
I guess I'd make two points: first, as a general rule I'm not so keen on purely redistributive transfer payment. In other words, tax cuts for folks who aren't paying taxes. That's just a preference of mine.
Second, there's a political economy aspect to this: Social Security has retained public support in part because it is seen as an "earned benefit," not "welfare." As we start monkeying around with payroll taxes, the perception becomes that people are receiving benefits that they didn't pay for. I don't think that's good for the program overall.

Anonymous said...


Your description of the SSI provision is slightly misleading.

The provision provides a one-time payment to SSI recipients, including those who lost their eligibility in the previous two months for excess income.

It is not an SSI payment, per se, but a stimulus payment. So it does not place those people "back on the program," as you said.