Payroll tax cut: What about Social Security?

@CNNMoney December 8, 2011: 8:04 AM ET
Social Security is supposed to be a self-financed program that pays out benefits earned by those who paid into the system. But some worry the payroll tax cut could endanger that concept.

Social Security is supposed to be a self-financed program that pays out benefits earned by those who paid into the system. But some worry the payroll tax cut could endanger that concept.

NEW YORK (CNNMoney) -- In all the talk about whether to extend the Social Security payroll tax cut, a lot of the focus is on the economy: Will the recovery suffer if Congress lets it lapse?

Much less prominent in the discussion is the potential effect of the payroll tax cut on the Social Security trust funds.

Technically, it should have no effect.

While the tax cut would reduce revenue flowing into Social Security, the Treasury Department would credit the trust funds -- dollar-for-dollar -- with the money that would go into workers' pockets. It would then simultaneously deduct that amount from the government's general revenue fund.

In other words, the Social Security trust funds would be made whole.

"We estimate that the projected level of the [program's Old Age and Disability] trust funds would be unaffected," Social Security Chief Actuary Stephen Goss wrote in a letter this week to Treasury Secretary Timothy Geithner and White House budget director Jacob Lew.

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Senate Democrats want to extend the payroll tax cut into 2012 and expand it so that workers would only pay 3.1% of their first $110,100 in wages into Social Security, down from 4.2% today and well below the 6.2% normal rate. Senate Republicans have simply proposed extending the 4.2% rate.

Either way, the same revenue-transfer principle would apply.

Goss also noted that workers' future Social Security benefits would be unaffected because workers would be credited as if they paid the full 6.2% despite getting the payroll tax holiday.

But critics of the payroll tax holiday are worried about the precedent it sets.

"Social Security was not established to be a source of 'temporary' stimulus funds. The idea that its payroll tax rate should be moved up and down with economic events is highly dangerous to the program's financial future," Chuck Blahous, a public trustee for Social Security and Medicare, said in a statement.

Blahous and others argue that the more Social Security is seen as a program that must rely on general tax revenue, the less it will be viewed as a self-financed program that pays out earned benefits.

"Social Security will gradually be turned into something more akin to welfare, for which the funding is provided not solely by ... workers but also by a subsidy funded by those subject to income tax," Blahous said. To top of page

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