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THE PAYROLL TAX CUT: Talk about a Ponzi Scheme!

By Gwendolyn Mink

Is President Obama trying to kill Social Security without explicitly saying so? He put Social Security “on the table” for consideration by his Deficit Commission — even though Social Security has not contributed to creating or sustaining the deficit/debt in the first place. He kept Social Security on the table when he made a deal to delegate deficit reduction authority over entitlements to an undemocratic Super Committee. Now, in a speech reportedly about jobs, he proposed to extend and increase the ill-considered FICA tax cut he embraced last December — a tax cut that directly undermines the financial integrity of Social Security.

According to the White House Fact Sheet on “The American Jobs Act” the FICA tax holiday for workers will be increased to a 50% reduction, lowering it to 3.1%. Under the 2010 tax deal, the payroll tax for workers was reduced from 6.2% to 4.2%. In addition to expanding the tax cut for workers, the President proposes to extend the FICA tax holiday to employers by cutting in half the employer’s share of the payroll tax through the first $5 million in payroll.

Big questions about the wisdom, efficacy, and implications of a tax-based jobs strategy need to be debated. Even bigger questions about the consequences of the payroll tax holiday in particular need to be answered. These questions are not just about the relationship between payroll tax cuts and job growth. They are about the future of Social Security.

The FICA/payroll tax goes into the Social Security Trust Fund. This is a dedicated fund currently worth $2.6 trillion, which has been built up over time through employee and employer contributions, along with accrued interest. Current and future Social Security beneficiaries receive benefits from this fund. No general revenues are involved, except for administrative and clerical costs.

Under the payroll tax cut initiated in the 2010 lame duck tax deal, the revenue loss to the Trust Fund from the payroll tax holiday is made up through compensatory payments into the Trust Fund from general revenues. The President proposes to continue this scheme — deepening a relationship between Social Security and general revenues (read deficit) that did not exist until the December 2010 tax deal. This will make Social Security increasingly vulnerable to demands for “reform.”

In the worst case, Congress could choose to enact the payroll tax cut without actually appropriating revenue compensation for the Trust Fund. This would mean that the payroll tax cut directly depletes the Trust Fund, creating financial/actuarial problems far sooner than the currently anticipated shortfall date of 2036.

But even if the Trust Fund receives full revenue compensation — for both employer and employee contributions — Social Security will be jeopardized. That’s because the resources in the Trust Fund will be increasingly comingled with general revenue funds — and, hence, increasingly connected to the deficit.

If the government can’t pay back Social Security money it has borrowed to pay for other things (through IOUs, bonds, etc), it certainly won’t be shy about cutting Social Security to pay itself back for funds it shared with Social Security to offset revenue losses from the payroll tax holiday.

Also worth worrying about here is contagious political cowardice about “raising taxes.” The payroll tax holiday is framed as just that — a holiday, ie, a short-lived break. But as we know from other tax cuts with built-in expiration dates, the planned end of a tax cut quickly becomes a “tax increase” in popular parlance. There hasn’t been much resolve to allow the years-long tax holiday for the rich to end. When the time comes, will there be greater resolve to allow an end to the 2-year tax holiday for workers and 1-year tax holiday for employers? Even when billed as a “middle class tax increase” and a “job-killing tax on business”?

Once the payroll tax basis of Social Security financing has been corrupted the future of Social Security will no longer be in doubt. It won’t have one.

Mink is co-editor of the two-volume Poverty in the United States: An Encyclopedia of History, Politics and Policy and author of Welfare’s End.