Payroll Tax Cuts: Will They Bankrupt Social Security?

Nov 30, 2011 5:59am

The Democratic winds of high-income taxation are picking up and the Republican thunderheads of off-setting spending cuts are rolling in as Capitol Hill braces for yet another partisan thunderstorm.

This time the battle is over payroll taxes, which fund Social Security, and whether to end, extend or expand the 2 percent cut that is set to expire December 31.

The one-year cut to Social Security’s funding stream decreased federal revenues by $112 billion in 2011, but the already-dwindling trust fund for Social Security remained untouched  because the government borrowed extra money to fill the gap, adding instead to the $1.3 trillion deficit.

“On paper [the payroll tax cut] does nothing to Social Security,” said Andrew Biggs, a resident scholar at the American Enterprise Institute. “It is just as solvent as it was before. But that’s not the sort of bookkeeping that you would do in the private sector.”

Senate Democrats want not only to extend the current tax break, but further reduce it from the original 6.2 percent to 3.1 percent. The Democrat’s proposal also cuts employers’ share of the payroll tax in half, down to 3.1 percent on the first $5 million paid in wages.

Congressional Republicans, who are wary of even extending the cut at its current 2 percent level, are unlikely to support the expanded cuts that Democrats are pushing for.

“The problem here is that the payroll tax doesn’t go into general revenue, it supports Social Security,” Senator Jon Kyl, R-Ariz., the No. 2 Republican in the Senate said on “Fox News Sunday.” “And you can’t keep extending the payroll tax holiday and have a secure Social Security.”

Biggs, the former principal deputy commissioner of the Social Security Administration, said Social Security is already running on a deficit. Even without the payroll tax cuts, revenues cannot keep up with the flood of baby boomers who are retiring at the rate of about 10,000 per day, he said.

“In the short term the government can make up the difference in the lost payroll taxes,” Biggs said. “Social Security benefits will continue to be paid. The real question is: are we undermining the financing of a program whose finances are already precarious?”

When the tax cut was enacted as part of the 2010 stimulus package, it was intended to be a one-year, short-term break for middle-income Americans.  A family earning $50,000 per year saved about $1,000 on their taxes in 2011 because of the cut.

“If it doesn’t [get extended] every paycheck in the country will go down on January 1,” said Chuck Marr, the director of federal tax policy at the Center for Budget and Policy Priorities. “It’s real money. Every person you see every day has a thousand dollars less money, and that’s a lot of bucks.”

Read more about whether payroll tax cuts actually stimulate economic growth.

This time around both parties are in agreement that the cuts must be paid for, but just how to offset the cost is driving a wedge between them.

To offset the $265 billion price tag on their one-year tax break, Democrats propose adding a decade-long 3.25 percent surtax on incomes exceeding $1 million.

Republicans have called this “millionaires tax” a non-starter. Senate Minority Leader Mitch McConnell, R-Ky., said today that Republicans will offer an alternative way to pay for the extension, but did not provide details.

“In all likelihood, we will agree to continue the current payroll tax relief for another year, but we believe that it should be paid for,” McConnell said Tuesday. “It will be paid for in an acceptable way that does not adversely impact job creation at a time when we are either in a recession or look very much like we’re in a recession.”

ABC News’ Sunlen Miller contributed to this report.

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