Obama, GOP Plans for Payroll Tax Holiday Could Unravel Social Security

Washington, D.C. — The payroll tax holiday recently unveiled by President Obama and Republican Congressional leaders could lead to the “unraveling of Social Security,” charged Eric Kingson, Co-Director of Social Security Works and an expert on Social Security.

“It’s easy to enact tax cuts,” said Kingson. “It’s very hard to get rid of them, as we have seen for the last year during the debate about the expiring Bush tax cuts. Democrats have just been backed into a corner on the tax issue and forced to renew tax breaks for the wealthy despite making it a top campaign pledge that they would not do such a thing. Why should it be any different next year when Republicans scream that Democrats want to raise your payroll taxes by 50 percent as the 2012 election approaches.”

President Obama has proposed reducing the employee’s share of the payroll tax from 6.2 percent to 4.2 percent. Restoring the 2 percent lost due to the payroll tax holiday would be a nearly 50 percent tax increase on what workers would be paying throughout the year.

Two percent of taxable payroll is what Social Security’s actuaries calculate is needed to put Social Security in surplus for the next 75 years. “There are already many in Washington who want to cut Social Security’s modest benefits, which average just $13,000 a year,” claimed Kingson. “If the tax cuts became permanent and if a future Congress chose not to continue to reimburse the Social Security Trust Funds for the lost revenue, today’s manageable shortfall would double, becoming much less manageable.  There would be tremendous pressure to make deep cuts to middle class benefits, even as the population was rapidly aging.”

“A payroll tax holiday will also promote Social Security privatization,” charged Kingson. “Once people get to put the 2 percent in their own pockets, they will be more susceptible to appeals that they should be able to put the funds into a private account where it can be gambled on Wall Street.”

“All of these likely scenarios, if they occur, will result in the unraveling of Social Security,” claimed Kingson.

A more complete analysis of the problems with the payroll tax holiday proposal is here and below.

President Obama’s Payroll Tax Holiday Could Unravel Social Security

Prepared by Social Security Works

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.

·         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.

o   House and Senate Republicans are opposed to any tax increases -- period. Recently, the Senate could not muster the 60 votes needed to raise taxes by less than a nickel on every dollar earned over $1 million, as Sen. Schumer proposed. Just 53 Senators voted to let the Bush tax cuts for millionaires expire – 7 short of the 60 needed.

o   Restoring the payroll tax cut on someone making $100,000 a year will be a tax increase of $2,000 and a tax increase of $400 on someone making $20,000 a year.

o   Restoring the 2% lost due to the payroll tax holiday would be a nearly 50% tax increase on 94% of all Americans if the tax has been lowered to 4.2% of earnings. (And just 6% of the workforce makes more than $106,800). 

·         It would undermine Social Security’s long-range solvency.

o   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.

o   Repaying the Social Security trust fund $120 billion each year will be increasingly more difficult in a political environment dominated by debates over federal deficits and debt; this could result 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.

o   It would make the goal of improving benefits for low-wage workers all the more difficult.

o   The only other option will be to cut benefits of the middle class. Because only 6% of the work force makes over $106,800 and because the benefit formula is highly progressive, even eliminating the benefits of richer Americans will not make much difference in solvency.

o   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.

o   Social Security has had such broad-based support because it provides meaningful benefits to the middle class, allowing those benefits to be provided to the poor, as well.

o   President Franklin Roosevelt when he designed Social Security said: “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.” 

·         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 A Roadmap for America’s Future, which is a plan to privatize Social Security. 

·         There are better ways to provide stimulus to the economy – and that do less harm to Social Security – than a payroll tax holiday. 


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