Tax Cut Deal a Hidden Threat to Social Security

Tax Cut Deal a Hidden Threat to Social Security

December 8, 2010

Huffington Post - The tax cut deal that President Obama struck with congressional Republicans contains a provision that could ultimately be the undoing of Social Security, say Senate Democrats and backers of the old-age and disability program.

Obama, as part of the Democratic package, secured a roughly 30 percent cut in the payroll tax, from 6.2 to 4.2 percent. Allowing it to expire in a year will mean that workers will see a nearly 50 percent jump in payroll taxes as the rate reverts back -- an event that will surely be described as a tax hike. The cut is estimated to cost $120 billion per year.

Democrats have never allowed the rate to be cut, even temporarily, in the history of the program, because payroll taxes feed the Social Security trust fund and create the political base of support for the program, said Nancy Altman, author of "The Battle For Social Security", a history of the program, and head of the advocacy group Social Security Works. Republicans have won a long-sought victory, even as President Obama hails it as a win for his party.

Republicans acknowledged that the expiration of the tax holiday will be treated as a tax increase.

"Once something like this goes into place, a year from now, when it expires, it'll be portrayed as a tax increase," said Sen. Bob Corker (R-Tenn.). So in a body like Congress, precedents matter and this is setting a precedent. I think that certainly is going to create some problems down the road if it passes."

Given that Congress, under Democratic control, can't gather itself to let tax cuts for the wealthiest Americans expire, members of both parties are convinced that letting the payroll tax rate revert back to its current spot will be near impossible.

"Once you bring a rate down, if it goes back up, people will feel that. They'll feel their paycheck being less and that argument" -- that letting it expire amounts to a tax hike -- "eventually is bound to be made," said Sen. Mike Johanns (R-Neb.).

"There's always a tendency to continue those things... Once something comes in, it's very difficult to change it," said Sen. George Voinovich (R-Ohio.)

He then volunteered, without prompting, that "It would be detrimental to the Social Security system, especially when it's in bad shape."

HuffPost noted that some of his colleagues would likely treat the deprivation of Social Security funds as a benefit of such a circumstance rather than a drawback.

"I suspect so, yes," agreed Voinovich.

A White House official dismissed the concerns.

"It is explicitly temporary and there's a general revenue transfer in the bill so it will not negatively impact the social security trust fund at all," he said.

Sen. Barbara Mikulski (D-Md.), who chairs the Senate Subcommittee On Retirement and Aging, said she's concerned that the payroll cut will weaken Social Security and leave it vulnerable.

"I'm concerned this could be the beginning of the slippery slope to getting rid of the payroll tax and cause a way of getting rid of Social Security as a public issue in the way of heading to privatization," she said. "I know it's been recommended by several economists, but this is really big. My question is, shouldn't this be viewed in a more shock wave kind of way?"

Rep. Keith Ellison (D-Minn.), co-chair of the Congressional Progressive Caucus, echoed Mikulski's concern.

"On the surface, the payroll tax reduction of two percent is attractive, but when you get past the surface, it's deeply disturbing. Because what it means is we'll replace the loss of money from Social Security with general fund money, but in the past Social Security has been raided to help fund general fund programs. So how long will it be before somebody says Social Security is not sustainable and we need to cut the program?" he said.

"I'm afraid we are feeding into a larger narrative that goes toward eliminating Social Security."

Stripping Social Security of payroll tax revenue will make the program appear less viable in projections, which currently gauge that it can pay full benefits until 2037 and roughly four-fifth of benefits over the next 50 years. That vulnerability can then be exploited.

"The difficulty you have here is you have a very large federal deficit and you've got a Social Security fund that really needs some work," said Johanns. "Social Security has got to be part of the mix [of deficit-reduction proposals]. So stay tuned. There's a lot of stories to be written about that between now and a year from now."

Lamar Alexander, the Senate's number-three Republican, also said that reform of Social Security should be tied to moving that tax rate back up.

"My personal hope is that it doesn't become permanent unless we deal with a way to make Social Security solvent over the long term," he told HuffPost. "You have to remember, the payroll tax funds Social Security, and I like the idea of a lower payroll tax contribution, but we've got to make sure Social Security is solvent, which we should be doing this next year as the first order of business."

The way to make the program "solvent" and keep taxes low, of course, is to reduce benefits.

Reducing a person's responsibility to contribute to Social Security also deprives the program of the political and moral capital that has kept the program in tact despite fierce opposition from a determined investor class. Altman notes that such responsibility was put into place by FDR for just that purpose.

"We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics," FDR told a Treasury official in 1941.

Senate Majority Leader Harry Reid, a strong defender of Social Security, told HuffPost he isn't worried about the threat to the program.

"The money doesn't come out of Social Security. It comes out of the general fund," said Reid.

Reid is correct. The revenue that is lost to the payroll tax cut will be forwarded from the general fund to Social Security. But it will then become a line-item in the federal budget, a tempting one to cut.

It also undermines the self-funding nature of the program, Bob Corker observed.

"It really begins to break down the whole notion even further of a Social Security trust, when general fund money is going in," he said. "We've already abused the Social Security trust, and there's no question that taking this action is just another portion of the camel nose under the tent."

Corker said he would have liked to see Social Security reform coupled with the tax cut.

Max Baucus (D-Mont.), chairman of the Finance Committee, said he wasn't sure if the tax holiday would be allowed to expire in a year and would depend on economic conditions.

"Where are we gonna be in a couple years? What's the economy in a couple years? What will unemployment be? What will other indicators be? But I do think it's important to have a break in payroll taxes," he said.

The payroll tax cut that Democrats have resisted for decades is being pushed through as part of a deal moving like a Toyota dump truck with the gas pedal stuck.

"I haven't even had a chance to consider that potential," said Sen. Mark Udall (D-Colo.), when asked about the effect of the payroll cut on Social Security.

Others think the holiday will be just that -- a holiday.

"I see it as a threat to Social Security, but I don't see it as being continued as a noncontributory payment with the precarious position Social Security is in. This is an emergency move," said Sen. Frank Lautenberg (D-N.J.).

Sen. Jeanne Shaheen (D-N.H.) said that the threat to Social Security is "obviously a concern" and that "the goal here is to get the economy moving and start to create jobs. It's not yet clear to me that that's the best way."

The Center for Budget and Policy Priorities, meanwhile, has cast doubt as to whether the payroll tax cut is the most efficient way to pump money into the economy.

Cutting the payroll tax gives more than twice as much benefit to a person making $100,000 as to a person making $50,000, Altman noted, and dividing the stimulus evenly, and simply sending an equal check to every worker, would be far more desirable.

Or Congress could simply extend the Making Work Pay tax credit, which the payroll tax holiday is reportedly meant to replace.

Sen. Kent Conrad (D-N.D.), who competes with the GOP in his zeal for reforming Social Security, welcomes the cut.

"I strongly support a payroll tax holiday because Congressional Budget Office has told us it is the second most powerful thing we can do after extending unemployment insurance to help with job creation," he said.

Conrad said that Congress will soon have the opportunity to take drastic deficit reduction measures in a few months when the body is required to raise the debt ceiling.

"We still have that responsibility, and that opportunity, and that's got to be the next shoe that drops here," he said.