The short answer is that Social Security in our view is a contributor to the deficit. The amount is less important because the short answer is no one knows the extent.
FICA taxes contribute to the deficit today, not just in the future. FICA taxes restrict the economic activity which generates income taxes that would pay down the deficit. They lower the incentive to work, and increase the incentive to evade or avoid the tax system all together. They make the cost of goods produced in the United States less competitive in the world markets, which costs us jobs.
The larger impact on the deficit comes as FICA diverts taxable income away from the general fund to the retirement system. FICA and Income taxes are connected because they compete for resources within the same tax base. They are like two straws drinking from the same soda. What one takes is not available for the other. This impact is enormous.
There are people who will disagree with our position. These people will argue that FICA isn't a tax at all. It is an economic investment which will pay-off at retirement. Further they suggest that it is an investment which lowers the overall borrowing costs of the government. Our surveys find very little public support for this theory. ABC News/Washington Post polls showed that 81% of Americans believe that Social Security is heading for a crisis without changes. So if it is an investment, most people think it is a pretty bad one.
No one can tell you how much Social Security contributes to the deficit. The more it is a tax, the more it contributes to the deficit. The more it is an investment, the less it contributes.FICA Is A Tax
The flaw in most commentary about Social Security is that it assumes that FICA taxes and Income taxes are unrelated. They are related because FICA taxes and Income taxes compete for resouces within the same tax base. You might view them like two straws drinking from the same soda. What one takes, the other cannot. Every dollar that is collected by FICA is a dollar that could have been raised to pay down the deficit. In the extreme view, we are allocating our tax base to our own retirement system and putting the rest of the government on our kids credit card.
The more people view that it is a tax, the more it adds to the deficit. As a tax, it directly contributes to the underground economy - now estimated to be about 2 trillion dollars. As a tax, it creates a significant pushback on general taxes. It is not possible to miss the correlation between rising FICA taxes and increasing pushback on income taxes. Today 47% of American households had no income tax obligation, and yet more than half of them had a FICA contribution.
The other extreme view is that FICA isn't a tax at all. It is an insurance premium which people treat like an investment. Many years ago people though of it as an investment at least to some extent. The terms were so generous that my father worked two summers away from home just to qualify. His salary barely covered his gas and lodgings, but it added the two quarters necessary for him to qualify for Social Security. He not only thought of it as an investment but a good one. In the extreme view, it is just a forced investment which induces a reduction in personal savings.
Anyone telling you that Social Security does not contribute to the deficit believes that FICA is an investment. They believe that every man, woman, and yes child(contributing) to the system believes that it is an investment. We will tell you that people have different views of what FICA is or isn't. To the extent that FICA is considered a tax, it adds to the deficit in a significant way.
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