Payroll Tax Cuts: Will They Bankrupt Social Security?
EmailThe 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.
Best Commencement Speeches of 2012 
Joe Biden Recalls Death of Wife, Daughter
If that isn’t the goal it will certainly be the end result. The fact that the democratic party is pushing it tells you how warped the democratic party has become and how neither party gives a flying flip about the average working American who will never be able to save enough to retire. I don’t like being forced to relearn past lessons. I dislike it even more when its not a lesson that I ever forgot but I’m going to feel the effect of other people’s stupidity and/or greed.
Posted by: whatever | November 30, 2011, 6:11 am 6:11 am
The democratic party used to support Social Security. I will now be shopping for another candidate that actually supports this ESSENTIAL program. This is a key issue for me.
Posted by: Brave_Brick | November 30, 2011, 6:56 am 6:56 am
I am not sure how the SS Trust is being managed. Is the payroll tax being credited to the SS fund even though is not collected? I understand that the SS Trust is paying out more than it is taking in, being a baby boomer I paid in extra so that the excess funding would be in the Trust when I retired.
The Federal branch borrowed that surplus over those years, and now that the cash flow is negative, or in deficit, government is repaying those surplus funds. I understand that the Trust would reach zero around 2040 when that surplus is consumed. That would put the Trust back on it’s original, post Reagan, ‘pay as you go’ footing where incoming dollars were used to pay for those retirees drawing SS.
The part that makes it difficult to comprehend is the Trust was used in one of those ‘have your cake and eat it, too’ deals. We paid the money in, the government spent it providing services, and now the Federal branch owes it back to the workers that paid it in.
The problem is while the Trust surplus is around 2.6 trillion, around seventeen percent of the total National debt, paying back that borrowed money is going to be difficult when the Nation hasn’t stopped borrowing money. The representatives have become accustomed to having that surplus to spend, and even though there is little surplus to borrow, they continue to spend it and more.
This article said that the SS Trust was in deficit, but I have my doubts. In 2010, the Trust paid out 712 billion and took in 781 billion for a net addition to the Trust of 69 billion dollars. If it is currently running a deficit, then the payroll taxes not collected are not being deposited. With that in mind, it would appear that our current Congress is in the process of turning Social Security Insurance into something other than an earned benefit plan.
Posted by: Dan | November 30, 2011, 7:40 am 7:40 am
Dumb question! Annual deficits > $1.5T, national debt of > $15T, and unfunded liabilities over $112T and they ask that question? The govt of the US is bankrupt, going deeper in debt every year for the foreseeable future and refuses to cut spending (cutting the growth is not cutting spending).
Posted by: deanbob | November 30, 2011, 7:51 am 7:51 am
If you want to pay for it, just collect Social Security withholding on ALL wages earned, not just the first $106,000. That would put a nice chunk of change into the system. Of course, it would mean higher taxes on wealthier people, something the Reps do not do – they just tax the middle class and slam the poor.
Posted by: pksk531 | November 30, 2011, 8:41 am 8:41 am
The quote “its just as solvent as it’s always been” is all any clear-thinking individual needs to know. Social Security was solvent before Lyndon Johnson pulled it into the general fund in 1965 and used the alleged “surplus” to offset the cost of fighting Vietnam. Congress liked the allure of the extra money so much that it in effect leveraged its own debt spending by allowing the “surplus” to be “invested” in U.S. Treasury bonds. The drop in SS revenue in 2011 of nearly $115 billion was offset by the U.S. government replacing the money with borrowed money. In other words, new debt was used to prop up indirect debt. To assume that SS is solvent requires one to believe that the U.S. is solvent since SS is the largest single holder of U.S. debt next to the Fed. If you did this in a public pension fund, the Justice Department would have you in jail for the next 1,000 years.
Posted by: wantingbalance | November 30, 2011, 8:59 am 8:59 am
It is like taking candy from a baby! The Democrats wish to disconnect the tie between paying for benefits and receiving benefits. This is the entitlement society where someone else will pay for everything!!
Posted by: Common _ Sense | November 30, 2011, 9:03 am 9:03 am
Beneficial programs like Social Security are important to the quality of life of the citizens of this country. I support candidates that support Social Security.
Posted by: Greg | November 30, 2011, 9:27 am 9:27 am
The Democrats want you to spend your retirement today to help prop up the economy in the hope that Obama and they are not forced into retirement next November. Just keep in mind that your retirement benefits are calculated based on your contributions. So spend today but you get less in SS benefits tomorrow.
I will keep the cut flowing into the IRA I opened last year when this passed. I’ll increase my IRA deposit to match any increase in the cut. And I thank the Democrats for helping me implement the George Bush partial privatization of SS. It was Bush’s ideal to let me keep 2-3% and put it into a private retirement account but I never thought it would be the Democrats that let it come to pass.
Posted by: RDH | November 30, 2011, 9:33 am 9:33 am
” Of course, it would mean higher taxes on wealthier people, something the Reps do not do – they just tax the middle class and slam the poor.”
Sorry PKSK but the “poor” are living for free in this country. I do not mean the truly poor and that is a small number. I mean those who choose to do nothing and let all of pay their way. Almost 1/2 of the people do not pay a penny in taxes. They get housing subsistance, food stamps, Medicaid, unemployment,WELFARE, free christmas gifts,free school supplies, free innoculations,free cell phones and I could go on but it never ends. I read in the paper today that Frankie Valli’s wife gets $30 K from hion a month from the divorce and over $800 a month from the government to help her support the children. When will we stop the politicians from BUYING votes to get re-elected. There is a huge number of people out there getting a free ride and we are paying for them.
Posted by: Doug | November 30, 2011, 9:46 am 9:46 am
As the Republicans march forward with destroying an essential program that millions of Americans rely on for their retirement plans, I continue to wonder how any citizen can support the Republican Party on any platform issue. It is crystal clear the Republicans support only the ideals and interests of the wealthy and large corporations. I see no reason why the salary ceiling for Social Security contributions of $103,000 cannot be raised to $250,000, $1,000,000 or eliminated altogether? Such a change will surely allow Social Security to continue for decades to come. My fervent wish for 2012 is the Democrats control the House, Senate and White House; then positive things will get done for all issues facing this country.
Posted by: rohnertpark1 | November 30, 2011, 10:01 am 10:01 am
Actually, Doug, the working poor DO pay taxes – they having with-holdings just like you and me. They just make so little that they get refunds at the end of the year. I do not know where you live, but here in NJ a 1 bedroom can go for $750 a month. Minimum wage won’t pay all of the bills of one person let alone a family. Those who get unemployment are those who have been hurt by the economy – had a job, but lost it. They are not getting a free ride, they paid into the system. Medicaid is for those who cannot afford insurance – a lot of people there.
Posted by: pksk531 | November 30, 2011, 10:08 am 10:08 am
Rohnertpark1 Sorry but you had the Dems in control of the Senate, the House ,and the White House 3 years ago and what did they do other than buy some more votes with giveaways.
Posted by: Doug | November 30, 2011, 10:15 am 10:15 am
When President Bush said he wanted you to be able to keep and put 2-3% of your SS taxes into a private retirement account, Democrats said it would destroy SS. When Democrats want you to keep and spend 2-3% of your SS taxes, it’s a good proposal? For whom? You or Democratic politicians worried about losing their jobs? And why isn’t this just as dangerous to SS? Look at the arguments being made to keep the cut. They are valid each and every year. This cut can easily become permanent. And you become poorer in your retirement. But if it gets Obama reelected, that’s what counts (to Democrats).
Posted by: RDH | November 30, 2011, 10:19 am 10:19 am
PKSK I am not talking about the real poor that work and can’t make enough, I am talikng about the freeloaders that are not working and are just sucking money out of those who do work and pay their way. There are more of them than the truly poor. You see them every day. They keep having babies and they don’t bother to get an education because they do not need one since we will pay their way. That is who the Pol’s use to get re-eleted.
Posted by: Doug | November 30, 2011, 10:30 am 10:30 am
Without term limits our democracy is doomed.
Posted by: ray | November 30, 2011, 10:48 am 10:48 am
“as Capitol Hill braces for yet another partisan thunderstorm.” — Really, not in Washington can’t be, impossible…. We need to vote all of these idiots out of office. Government also needs to fix social security. I am paying into it and at current rate I will not see any benefit from it when I get to retire. SS administration should also focus on going after those who are receiving benefits that are not entitled to them. this would save millions, but I guess millions in savings aren’t important.
Posted by: NoSpin1600 | November 30, 2011, 10:49 am 10:49 am
With or without the tax cut SSI will not survive the boomers, and neither will medicare.
Posted by: snewsom2997 | November 30, 2011, 10:51 am 10:51 am
Social security is NOT being used for what was intended,…it has become a way for career politicians to stay in power by creating “entitlements” that cannot be funded, just promises made and the country going down the johnny flusher. FACE IT…we are BROKE!
Posted by: angus | November 30, 2011, 10:59 am 10:59 am
I don’t know why this is being touted as a “tax cut”… as it will most likely be made up when we file our income taxes and we’ll have to make up for it then, along the lines of that “$250 check for working families” from 2008. (which I didn’t get, by the by…)
This *rebate* turned out to be something you had to claim when you filed… (a nice surprise for my college-aged daughter at the time…) and I bet this Social Security tax break will be handled the same way..
These purported tax cuts are really never what they seem to be… unless your mega-rich or a corporation that has a few members of Congress in your pocket…
Posted by: Jon | November 30, 2011, 11:20 am 11:20 am
Social Security has nothing to do with the annual deficit. That is all about the wars, the military-industrial complex, all the “national security” obligations in the U.S. and abroad, plus interest on the debt and veterans obligations. Social Security is paid for by the income from the payroll tax, plus the interest due to the SS Trust Fund. SS is NOT a deficit issue. It is used as a smokescreen for the continuation of our govenment building aircraft carriers that cost $15 trillion and fighter plans that cost in excess of $300 million EACH! The real savings for our federal govenment comes in ending the wars, bringing our troops home from abroad, and cancelling the build of our military hardware projects. Social Security is fine the way it is for years and even decades to come.
Posted by: George Fulmore | December 1, 2011, 8:06 pm 8:06 pm
Get rid of SS and give the 6.2% back to where it belongs. If you don’t plan for retirement and you need SS to survive in retirement, oh well, so sorry, too bad.
Posted by: M | December 2, 2011, 11:57 am 11:57 am
Hi, this weekend is nice for me, because this time i am reading this great informative article here at my home.
Posted by: Doug Desrosier | December 3, 2011, 2:14 pm 2:14 pm
Just remove the social srcurity cap and we will have plenty of money. When you hit the $160,000 mark on your wages yo stop paying into social security – why? Everyone should continue to pay into it.
Posted by: Nancy Harms | December 11, 2011, 8:24 am 8:24 am