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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

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