President Obama's Payroll Tax Holiday Could Unravel Social Security

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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.

·         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.

·       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.

·         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.

·       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.

·       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.

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

·       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.

·       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. 

·       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.

·       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.