Disagreement Over
Payroll Tax Cut’s Impact on Social Security
Published: December 15, 2011 - New York Times
WASHINGTON — For all of the partisan brawling over President Obama’s call to
extend a temporary payroll tax cut for 160 million Americans, one concern is
bipartisan: a significant minority of Democrats and Republicans say that cutting
the taxes that finance Social
Security benefits will further undermine the program.
The Obama administration, many budget experts (but not all) and the chief
actuary for the Social Security Administration say the proposal will do no such
thing. But some conservative Republicans and liberal Democrats who agree on
little else are just as adamant that it will.
Both parties predict the payroll tax cut will be extended beyond its Dec. 31
expiration, though the question of how — or whether — to pay for it and some
other unrelated issues in the year-end legislation continued to hold it up on
Wednesday. Still, the disagreement over the tax cut lingers. It is less over
money than philosophy, and reflects a debate as old as the 75-year-old program
about Social Security’s fundamental structure.
Critics predict that one extension will lead to another as politicians balk
at raising taxes to their former level, especially if unemployment remains high.
“Imagine that next December the unemployment rate is 8 percent and a year
later it’s 7.4 percent,” said Robert Reischauer, a former director of the
Congressional Budget Office, who is one of two public trustees for Social
Security. “We’ll still be trying to stimulate employment and terminating the
payroll tax holiday will be a big hit on most families, one that will hurt job
growth.”
Democrats fear that repeated extensions would disrupt the link that President
Franklin Delano Roosevelt forged to lock in support for Social Security: with
workers taxed for their benefits, politicians would not cut them. And
Republicans object that transferring general revenues to Social Security to
offset the tax cut makes the program more like welfare, and worsens the federal
budget deficit.
Politics aside, the bottom line is that a temporary tax cut is
inconsequential to Social Security’s long-term health, from an accounting
perspective. The threat remains the financial pressure of an aging population.
Social Security is essentially a pay-as-you-go system, with payroll taxes
from workers flowing back out to retirees, survivors and the disabled. Last
year, before the tax cut, the system for the first time since 1983 collected
less in taxes than it paid out to 55 million beneficiaries — $49 billion less.
The program’s operating deficits will grow as more of the 78 million baby
boomers become eligible. But trust fund reserves built up over years of annual
surpluses will not run out until 2036, when tax revenues will cover
three-quarters of benefits, trustees project.
That projection would be unchanged by Mr. Obama’s proposal to extend and
expand the payroll tax relief that he and Congressional Republicans agreed to a
year ago to spur the economy, because they also agreed to transfer general
revenues to Social Security to make up the difference.
The trust fund “would be unaffected by enactment of this provision,” Stephen
C. Goss, the chief actuary for Social Security Administration, wrote to
administration officials — just as he had about the tax bill a year ago.
The 12.4 percent payroll tax is split between employees and employers, and
the current break reduces workers’ share by 2 percentage points, to 4.2 percent.
Because that reduces Social Security revenues this year by about $105 billion,
the program is credited with that amount from general revenues. And workers get
credit for the full tax for purposes of calculating their future benefits.
This fall, with the economy still fragile, Mr. Obama proposed as part of his
$447 billion job-creation plan to extend the tax cut for 2012, increase it to
3.1 percentage points and expand it to employers for their first $5 million of
payroll — in effect cutting the tax in half for employees and most employers.
His proposal, which was more popular with Mr. Obama’s political advisers than
with Treasury officials, would have reduced Social Security revenues by $240
billion next year. Democrats recently limited their proposal to employees and
the self-employed, cutting its cost to $185 billion given complaints from
liberals and conservatives.
Last December liberal lawmakers, conservatives and advocates for the elderly
mostly went along with the tax cut since it was intended for a year only. But
when the White House began talking of an extension months ago, after economists
predicted that economic growth would slow half a percentage point without the
tax cut, opponents in both parties mobilized.
Sixty-one liberals in the House, nearly one-third of the Democrats there,
wrote to Mr. Obama in July to say they were “gravely concerned that yet another,
unacceptable cut to Social Security’s revenue stream appears to be on the
table.”
Citing the Bush-era
tax cuts that were supposed to end in 2010, they expressed fear that the
payroll tax cut would become permanent as politicians shied from letting them
lapse. Mindful of some Republicans’ goal of privatizing Social Security, the
Democrats suggested that tinkering with the payroll tax “may be used as the
first step in a larger battle to fundamentally dismantle Social Security.”
Six years ago, Democrats successfully derailed President George W. Bush’s
plan to partially privatize Social Security by letting workers divert 2
percentage points of their payroll taxes to personal retirement accounts.
Charles Blahous, Mr. Bush’s adviser on the issue, recently wrote that the
payroll tax cut and the extension that Mr. Obama initially proposed would reduce
revenues to Social Security more over two years than Mr. Bush’s plan would have
over its first decade. The Bush plan, however, also would have reduced workers’
future benefits commensurate with the taxes they diverted to personal accounts —
a feature that helped defeat the proposal.
Mr. Blahous, now one of two public trustees for Social Security, said in his
analysis that the payroll tax cut “would take a major step toward transforming
Social Security from what it has long been — an earned benefit, funded by
separate worker payroll taxes — into an income-tax based system more akin to
welfare.”
That is not the worry of the other public trustee, Mr. Reischauer.
“The nightmare that I have is that when it comes time to raise the tax back
up to 6.2 percent, conservatives are going to propose that these two percentage
points of payroll tax be devoted to individual accounts.” Mr. Reischauer said.
“That will precipitate a huge fight and could change Social Security in a
fundamental way.”