A provision that was designed to boost the economy in the tax cut compromise struck by President Obama and congressional Republicans is viewed by supporters and opponents alike as opening the door to major changes in how Social Security is financed.
The proposed reduction of the payroll tax levied on most workers is intended to accelerate economic recovery by leaving more than $100 billion in their wallets over the next year — money they presumably would spend.
Although the Social Security tax cut has attracted less attention than a proposed change in the estate tax and the continuation of George W. Bush-era tax breaks, some policy watchers say the payroll tax provision could have huge long-term implications.
It is intended to be in place for only one year. But if the Social Security change is extended — which some say is possible considering that Congress has showed itself unwilling to allow other tax cuts to expire — it has the potential to set in motion changes that have been long discussed but never acted upon.
Critics worry that this proposal could unravel Social Security. But supporters see an opportunity to start a debate about wholesale adjustments in the 75-year-old government-run program for retired and disabled workers, which many analysts contend is headed for insolvency in the not-too-distant future.
“It’s become the most intriguing part of the package,” said John Makin, a senior policy adviser at the American Enterprise Institute, a think tank that espouses conservative free-market policies.
The proposal calls for a tax “holiday” that would reduce the 6.2 percent payroll tax levied on most workers by 2 percentage points for income earned in 2011. Employers would continue to pay an amount equal to 6.2 percent of their workers’ salaries into the Social Security trust funds.
Many policy analysts say predictions that Congress will never allow the 6.2 percent tax to be restored are unfounded. Yet others contend that even if the tax rate is allowed to increase in 2012, the temporary reduction would demonstrate that Congress is willing to make significant changes in Social Security.
Touching the ‘Third Rail’
A payroll tax cut has been floated at least as far back as 2002 as an economic stimulus measure. But Craig Copeland, director of the Social Security Research Project at the Employee Benefit Research Institute, said the idea has never before gained much traction. “Certainly, it has been a step that hasn’t been taken. It’s new in that sense. And therefore, the next step may be easier now because in previous years, they couldn’t even get to a temporary holiday,” Copeland said.
For decades, one of the most common clichés in political circles has been that Social Security is the electrified “third rail” of politics — touch it and perish. Obama’s tax package brushes up against it, and the sparks have begun to fly.
Although clashes over how to keep Social Security solvent have been loud in recent years, the debate over the payroll tax rollback has been relatively muted. It is likely to increase in volume in the next Congress as lawmakers begin to grapple with questions about containing the federal debt.
Since the Social Security Act (PL 74-271) was enacted in 1935, the program has relied strictly on a payroll tax that workers and their employers pay equally. With the exception of some government employees, workers who earn up to $106,800 annually now pay 6.2 percent of their income in Social Security taxes, and their employers match that amount. Self-employed workers pay 12.4 percent.
There’s a powerful philosophical underpinning to that structure: Workers contribute to their own retirement benefits. The more they work, earn and pay, the more they get back — up to a point, since taxes and benefits are capped.
The payroll tax proposal would temporarily give employees extra take-home pay. The proposed tax rate reduction would allow a worker earning $50,000 to take home an extra $1,000 over the year and a worker making $80,000 would take home $1,600.
What Happens in a Year?
Another result would be an estimated $112 billion in lost revenue for the trust funds. Social Security would be credited with an equal amount from the federal government’s general fund, which comes mostly from income taxes. The administration says Social Security’s financial underpinnings would not be harmed.
But critics warn that a year from now lawmakers might be unwilling to allow the tax to return to current levels. Maria Freese, director of government relations and policy at the National Committee to Preserve Medicare and Social Security, said that the change poses a disaster for the program because it would make Social Security subject to the judgments of lawmakers increasingly concerned about the rising national debt.
If Social Security has to depend on general revenue, “it starts having to compete with every other federal program for money,” Freese said.
A Washington Post poll this week illustrated public wariness about changing Social Security. The telephone survey of 1,001 adults found that 57 percent opposed the one-year tax cut.
“You’re talking about the beginning of the end for Social Security,” said Sen. Bernard Sanders, I-Vt., who said during floor debate Tuesday that Congress would never allow the tax rate to be restored.
Paul Van de Water, senior fellow at the liberal-leaning Center for Budget and Policy Priorities, is among those who doubts the tax cut would be made permanent. It might be renewed for a second year, he said, but not beyond that.
“With any luck it will be clear that a permanent extension would just be unaffordable,” he said.
And powerful interests are opposed. AARP, which advocates for older Americans, does not object to a one-year reduction but opposes making it permanent.
Financing for the Future
Makin, of the American Enterprise Institute, supports the tax rollback — although he says it should also apply to employers — and says it may provide an opening for discussing how to pay for Social Security in the long run. “We might want to reform the payroll tax, and basically how we fund Social Security. That’s going to be part of a very broad discussion of tax reform,” he said.
Henry J. Aaron, a senior fellow at the Brookings Institution, says the payroll tax reduction does not threaten Social Security. In fact, he said, it bolsters the program.
For decades after Social Security’s founding, Aaron said, supporters sought to have the government’s general fund support the program in much the same way that it pays for the military. “I think there’s a very good case for making a general revenue contribution a permanent part of the financing of Social Security,” he said.
“If this is a step in that direction, I think it’s a benign step.”
-- Theo Emery, CQ Staff
Top Democrat Identifies Another Threat To Social Security In Obama Tax Plan
An outspoken and respected House liberal is concerned that President Obama's tax cut plan will pose more than one threat to Social Security.
Progressive advocates, and a wide swath of the Democratic party, oppose Obama's call for a partial employee payroll tax holiday. Not because they don't want workers to have extra cash in their pocket, but because they worry that a supposedly temporary payroll tax rate will become the new normal and jeopardize Social Security in the long run. Next year, they worry, Republicans will characterize allowing the holiday to lapse as a "tax hike" on workers, and Dems will be cowed into extending it.
Rep. Rush Holt (D-NJ) shares that fear. But even if things don't shake out that way, he says, treating the funding mechanism for Social Security as a variable that can be tweaked to fund stimulus or reduce deficits will erode Social Security's status as the third rail of American politics, and leave it vulnerable to future attacks from the right.
"What they've done is put social security in a package with the Bush tax rates and the [Alternative Minimum Tax] fix and the estate tax and business expensing," Holt said in a phone interview yesterday. "And it's [become] something you deal: you take a little bit here, you give a little bit there."
Holt worries that if Congress and the White House unite to turn the payroll tax into a budget item, then it's only a matter of time before it loses its uniqueness, and then it will be susceptible to attacks from its long-standing enemies.
"Social Security becomes something we use to stimulate the economy, next year we'll use it to balance the budget -- it becomes another government program like the Endowment for the Arts," Holt said. "Ever since 1935 there have been dedicated enemies of Social Security and the reason it has been able to withstand the attacks is that it is special. If that goes away, Social Security goes away in no time flat."
Holt raised this objection to White House officials. Without naming them, he says they've basically blown him off.
"Of all the things the President seems to be willing to negotiate, I'm dismayed that the integrity of Social Security would appear to be one of them," Holt criticized. "It must be because the advisers around him don't have a s nse of history."
His pleas, he said, "fell on deaf ears or was completely ignored."
He raised these very concerns at a private Democratic caucus meeting last night. And he has an apparent ally in Rep. Brad Sherman (D-CA), who's introduced a plan to his colleagues to eliminate the payroll tax holiday and replace it with a one-time check -- to refund to workers an equivalent percentage of the Social Security tax they payed in 2010.
But Democrats will have a hard time making any changes to the tax plan -- including simple ones like Sherman's. And if his effort is unsuccessful, he and Holt will have to cross their fingers and hope for the best. Or, in a worst case scenario, say "I told you so" to Democratic leaders.
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