Some Worry Payroll Tax Cut Threatens Social Security

John Ydstie December 10, 2010

Lots of Democrats have problems with the big tax deal President Obama made with Republicans. They don't like the extension of the Bush tax cuts for the wealthy. They don't like the provision on the estate tax. And some are getting heartburn over the proposed reduction in Social Security taxes because they worry it could seriously weaken the program.

The Social Security piece of the controversial tax package seems like something most taxpayers would welcome. Every worker who pays Social Security payroll taxes would see them cut to 4.2 percent from the current 6.2 percent. The maximum tax break would be a little over $2,000, and the cut would expire after one year.

Obama certainly seemed pretty pleased with the provision when he described the deal in a news conference on Tuesday.

Social Security benefits are largely financed by payroll or Federal Insurance Contributions (FICA) taxes. But in 2010, the government will pay out more benefits than it receives from payroll tax revenues, according to projections by the Congressional Budget Office.

Here, a look at the number of people receiving benefits and the health of the Social Security trust funds.

-- An estimated 156 million people -- 93 percent of all workers -- are covered under Social Security.

-- About 53 million people will receive $703 billion in Social Security benefits in 2010.

-- Social Security trust funds currently contain $2.5 trillion for retirement benefits.

-- The Disability Insurance Trust Fund -- one component of Social Security, which provides benefits to people with disabilities -- is projected to be unable to pay benefits as early as 2018. The combined Social Security trust funds -- Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) -- are projected to become exhausted in 2037.

The government has invested all of the Social Security trust funds in Treasury securities -- effectively making a loan to itself. But when baby boomers retire and collect Social Security -- the Social Security Administration projects there will be almost twice as many older Americans in 2035 as there are today -- the government will have to come up with the funds.

One possible solution, proposed by Alan Simpson and Erskine Bowles, co-chairmen of the presidential deficit commission, is to gradually raise the retirement age from 67 to 69.

The White House says the tax cut legislation will have no impact on Social Security trust funds because money will be transferred to the trust funds from general tax revenues.

"As a result of this agreement we will cut payroll taxes in 2011, which will add about a thousand dollars to the take-home pay of a typical family," he said. "So this isn't an abstract debate. This is real money for real people."

It's a good deal for the American people, Obama said. But the payroll tax cut makes Nancy Altman very nervous.

"This could eventually lead to the unraveling of Social Security," says Altman, a co-chair of the advocacy group Social Security Works.

She says it might look like a harmless one-year boost for struggling Americans. But Altman is certain Republicans will try to make the payroll tax cut permanent, which, she says, could lead to trouble for Social Security.

"The Bush tax cuts were supposed to be 10 years," she says. "And we see now that it's very hard once a tax cut is in place to repeal it. The fear is that once this cut is made it becomes permanent and all of a sudden Social Security's shortfall, which is very manageable at this point, would actually double."

Under the one-year deal hatched by Obama and Republican lawmakers, Social Security's long-term financial problems would not worsen. That's because the retirement program's trust fund would be reimbursed for its lost tax receipts. The money would come out of general revenues, the same pot that pays for food stamps and defense. But Altman, and some Democratic lawmakers, worry that if the payroll tax cut becomes permanent, Congress will balk at making up the shortfall year after year with general revenues.

"If we start to fund Social Security through general revenue," says Rep. Ted Deutch, a Florida Democrat, "given where we are today, through deficit spending, it will permit those who would like to, [to] move away from our long-standing, successful Social Security program to privatization and to benefit cuts. It will enable them to make those arguments in a way that they've never been able to make them before."

Deutch says he has no doubt that a year from now some Republicans will try to make the payroll tax cut permanent.

Republican Sen. Bob Corker of Tennessee is predicting the same thing. He says that a year from now when the tax break expires it will be portrayed as a tax increase.

And Republican Sen. Mike Johanns of Nebraska agrees.

"I anticipate that somewhere along the line somebody's going to make that argument, whether I agree with it or not," he says.

In any case, Johanns warns against "messing with Social Security."

"We've got to get back to the reality that this is a system that needs our thoughtful consideration on how best to improve it," he says.

There's no question that the White House understood it was taking a risk. But the administration couldn't persuade Republicans to renew a stimulus program targeted at lower-income workers. So, with the economy continuing to struggle, the White House opted to embrace the stimulus provided by the Social Security tax cut, and worry about the repercussions a year from now.

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A lot of Democrats have problems with the big tax deal President Obama made with Republicans. They don't like the extension of Bush-era tax cuts for the wealthy. They don't like the provision on the estate tax, and some Democrats are getting heartburn over the proposed reduction in Social Security taxes.

As NPR's John Ydstie reports, they worry it could seriously weaken the program.

JOHN YDSTIE: The Social Security piece of the controversial tax package seems like something most taxpayers would welcome. Every worker who pays the Social Security payroll tax would get to pocket an additional 2 percent of their salary instead of sending it to Social Security.

The maximum benefit would be a little over $2,000, and the tax break would expire after one year.

President Obama seemed pretty pleased with the provision when he described it in a news conference on Tuesday.

President BARACK OBAMA: As a result of this agreement, we will cut payroll taxes in 2011, which will add about a thousand dollars to the take-home pay of a typical family. So this isn't an abstract debate. This is real money for real people.

YDSTIE: It's a good deal for the American people, said the president. But the payroll tax makes Nancy Altman very nervous.

Ms. NANCY ALTMAN (Co-director, Social Security Works): This could eventually lead to the unraveling of Social Security.

YDSTIE: Altman, who co-chairs the advocacy group Social Security Works, says it might look like a harmless, one-year boost for struggling Americans. But Altman is certain Republicans will try to make the payroll tax cut permanent, which she says could led to trouble for Social Security.

Ms. ALTMAN: The Bush tax cuts were supposed to be 10 years, and we see now that it's very hard, once a tax cut is in place, to repeal it. The fear is that once this cut is made, it becomes permanent. And all of a sudden, Social Security's shortfall, which is very manageable at this point, would actually double.

YDSTIE: Now, under the one-year deal hatched by President Obama and Republican lawmakers, Social Security's long-term financial problems would not worsen. That's because the retirement program's trust fund would be reimbursed for its lost tax receipts.

The money would come out of general revenues, the same pot that pays for things like food stamps and defense.

But Altman and some Democratic lawmakers worry that if the payroll tax becomes permanent, Congress will balk at making up the shortfall year after year with general revenues.

Here's Congressman Ted Deutch, a Florida Democrat.

Representative TED DEUTCH (Democrat, Florida): If we start to fund Social Security through general revenue, given where we are today, through deficit spending, it will permit those who would like to move away from our long-standing, successful Social Security program to privatization and to benefit cuts.

It will enable them to make those arguments in a way that they've never been able to make them before.

YDSTIE: Deutch says he has no doubt that a year from now, some Republicans will try to make the payroll tax cut permanent.

Republican Senator Bob Corker of Tennessee is predicting the same thing. He says that a year from now, when the tax break expires, it will be portrayed as a tax increase. And Republican Senator Mike Johanns of Nebraska agrees.

Senator MIKE JOHANNS (Republican, Nebraska): I anticipate that somewhere along the line, somebody is going to make that argument - whether I agree with it or not.

YDSTIE: In any case, Johanns warns against quote, messing with Social Security.

Rep. JOHANNS: We've got to get back to the reality that this is a system that needs our thoughtful consideration and how best to improve it.

YDSTIE: There's no question that the White House understood it was taking a risk, but the administration couldn't convince Republicans to renew a stimulus program targeted at lower-income workers.

So with the economy continuing to struggle, the White House opted to embrace the stimulus provided by the Social Security tax cut, and worry about the repercussions a year from now.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.