President Obama has proposed a 2% payroll tax holiday on employees only. Currently, employees pay a 6.2% FICA tax on wages up to $106,800. The Administration’s proposal would exist for one-year and is estimated to cost $120 billion. The revenue Social Security would lose from the payroll tax cut would be paid back from general revenues by the U.S. Treasury. Here’s why this temporary move puts Social Security in danger:
It’s easy to enact tax cuts – it’s very hard to end them.
A 2% payroll tax cut significantly reduces people’s tax burden. Restoring the tax a year from now will result in a substantial tax increase, which Republicans will vehemently oppose – especially in the Senate where just 53 Senators voted to let the Bush tax cuts for millionaires expire – 7 short of the 60 needed.
Election-year politics will doom restoring the tax. A more conservative Senate and a Republican House of Representatives in 2011 will resist such a massive tax increase on virtually every worker in the country, especially leading up to an election.
Undermines Social Security’s long-range solvency.
- A 2% payroll tax cut, if unfunded from general revenue, doubles the 75-year projected shortfall projected by the actuaries in the 2010 Trustees Report.
- Deficit hawks will resist raiding the Treasury to pay for the tax cut after the first year; resulting in a huge revenue drain to Social Security.
Keeping the payroll tax cut in place but not paying Social Security back will lead to massive benefits cuts, even as the population rapidly ages.
- Making up for the $120 billion of lost annual revenue plus eliminating the already existing long-term shortfall will require deep cuts in benefits for the middle class and erode its support.
The weakening of middle-class support will unravel the program in the future.
- President Franklin Roosevelt understood this, when he designed Social Security:
“We put those payroll 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.”
A payroll tax holiday will promote privatization of Social Security. Once people are used to having the 2% cut in their own pockets, they will be more susceptible to arguments that they should be able to put the funds into a private account where they can control it. Two percent of the payroll tax diverted to private accounts is the amount Rep. Paul Ryan has proposed be diverted in his A Roadmap for America’s Future, which proposes to privatize Social Security.
There are much better ways to provide stimulus to the economy. They would do less harm than a payroll tax holiday, as described in this analysis by the Center on Budget and Policy Priorities.