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When I sat down this weekend I had planned a piece on the Gold Standard argument for the blog. By Monday morning I canned this idea for a rainy day in lieu of discussing the 2% decrease in payroll taxes.  The news made me think of my favorite band Modest Mouse, and if you ever have listened to their first big CD with “Float On” then you will remember a possible track titled, “Bury Me with It.” Now before you ask me what this has to do with a 2% decrease in payroll tax let me explain. There was a line in the song that stuck with me throughout undergraduate and through graduate school that said, “Life handed us a paycheck, we said ‘We worked harder than this!’”

Now stare at that line for a bit and think about. I do agree that I do not believe Modest Mouse was trying to make any reference to the Social Security system or even the true identity of a paycheck, but the feeling is still the same. Can you think back to a time where you have been paid a wage, and then received your paycheck at the end of the week to exclaim, “Really?”

To be truthful, I have never been a true fan of the current system for Social Security. In fact, I am not entirely for doing away with it but a reform is definitely needed. The original system is archaic and built on fundamentals outdated 20 years after their implementation. The system was never meant to be a main source for retirement. If you have been reading this blog for the last few months you know of my love for the historical aspect, and let’s review the origins of our current Social Security system.

The History

Here is your short and gritty historical overview of the current system. After the 1929 crash many Americans were left with no retirement plan and without a job to plan for one. Roosevelt heard the people and by 1934 ordered a committee on Economic Security to be convened. In their report they came back stating that the dependence of a group on one another had been “lost” over time. With this report Roosevelt went to Congress in 1935 to implore a system to ensure economic security for an aging population and families. The bill would be signed by Roosevelt in August of 1935 and the Social Security Act was born. (For a complete text of the original Act, or to read more on pensions that led to the Social Security act you can visit the Social Security Administrations Website)

The Current Public View

We have come a long way since those days, and we have tripped economically as we will continue to do so in the future. This is part of the cycle and economies do not continuously grow forever. There will be times of hardship, and there will be times of great success. I continue to hope for the latter to occur as soon as possible right now, but again I am a true optimist.

Title VIII of the 1935 Act Section 801 Number 5 (on Income Tax on Employees) sets the rate after 1946 to be 3 percent (SSA) combined. Our current system has this set at 12.4%, in part to make up for the increase in population over time. Although, many of us have the working knowledge that we (those of us born after the 1960s) may never see a dime of Social Security. I believe the age for retirement for us is now at 67 years of age, and they are looking to increase this in the future. The current influx of income from the reduction in the payroll tax is less likely to go back into one’s retirement plan (unless you are like me and always worried about it) but rather be spent on goods and services.

The Math Behind the Idea

For the 2011 tax year, Americans would pay 4.2% of their income into the current Social Security system instead of being taxed the current 6.2%. Someone earning $40,000 a year would receive an $800 benefit, and a $70,000 earner would save $1,400.

With this extra income they are hoping individuals will put the money back into the economy as opposed to saving. This one year plan will hopefully jump start the sluggish recovery and lead us into future economic stability. If this is the case, we will be curious to see the Moody’s Survey of Business Confidence along with the Consumer Confidence Survey have to say in the next few months.

Although, should this spark an uptick in the economy, the payroll tax reduction could be something favorable to the markets in the near future. Currently we continue to teeter without much of a trend, and I know it is driving the instructors crazy for Power Tag-Along 2.

Why Does This Matter for Traders?

So here is the 2% question, why does this matter? Well, suppose this does go the way they want it to and more money comes into the pockets of employees. This may turn around to increase disposable income (granted maybe not by much), and this will come back into the economy. Although, many such as Greg Mankiw and the CBO have come out in favor of an employer side cut. This would probably benefit the market more as there would be an increase of jobs. More Americans that can purchase goods, and the effect would create more money flowing through the economy. For those watching the interest rates, we could see the Fed making the decision to begin increasing interest rates in 2011.

Please take this as a note of a possible outcome, and the growth of the interest rates would be probably slow if at best.

Contributed by Susan Steward, Economist for Random Walk Trading.