Tax plan a raw deal for Social Security, critics say

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Left-leaning Social Security advocates are worried that the tax-cut compromise made between President Obama and Republicans will undermine the retirement safety net in the long run.

At issue: A provision that would reduce the payroll tax employees pay into the system for one year. The concern is that lawmakers will blink when it comes time to reinstate the tax at its current level.

To fund Social Security, workers and their employers each pay 6.2% of the first $106,800 in wages. The tax-cut deal would reduce the employee portion to 4.2%.

The idea is to let workers keep the money so they'll spend it and give the economy a boost.

The White House has said the Social Security system would be reimbursed for the full amount from general revenue -- an estimated $112 billion -- so it wouldn't affect the program's long-term solvency.

Social Security advocates don't doubt that's true over the coming year. But they worry that reinstating the 6.2% rate could be portrayed as a 50% tax increase.

"It's easy to enact tax cuts but virtually impossible to allow them to expire. This payroll tax holiday proposal will be no different. Election year politics in 2012 will doom the repeal of this [$112 billion] cut," said Barbara Kennelly, president of the National Committee to Preserve Social Security and Medicare.

If that prediction comes true, that could portend trouble for the program's funding in the future, Kennelly and other Social Security advocates say.

Since workers' payroll taxes are intended to fund Social Security benefits, mixing general revenue into the funding could weaken the program over time because it would have to compete with other important priorities paid for by general revenues, like education, Kennelly said.

As it is, the federal government will soon need to start paying back the $2.5 trillion in surplus payroll tax revenue that it has borrowed from Social Security over the years. That's because, starting in 2015, the amount of annual payroll tax income paid into the system will permanently fall below the amount of benefits that will need to be paid out.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,472.11 -29.54 -0.18%
Nasdaq 4,131.91 4.94 0.12%
S&P 500 1,873.47 -1.92 -0.10%
Treasuries 2.69 0.01 0.26%
Data as of 10:18am ET
Company Price Change % Change
Facebook Inc 60.64 -0.72 -1.17%
Bank of America Corp... 16.30 -0.07 -0.46%
Apple Inc 563.05 38.30 7.30%
Verizon Communicatio... 46.50 -0.93 -1.96%
General Motors Co 34.92 0.53 1.54%
Data as of 10:04am ET
Sponsors

Sections

Billionaire advocates for increasing a tax credit on wages as a way to attack the growing inequality in the U.S., but he's unsure of the benefits of raising the federal minimum wage. More

Apple increased its buyback and posted a strong second quarter, sending shares soaring. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

When you are just starting out or finally starting to get serious about saving, the basics will get you far. Here are more than a dozen tips that will help you lay the base for building your net worth. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.