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A Payroll Tax “Holiday” A Bad Deal for Workers and for America

  • There has been a lot of talk recently about giving America’s workers a payroll tax “holiday”.  Both the President’s deficit reduction commission and the Domenici-Rivlin debt reduction task force have recommended payroll tax “holidays” and now the President is also calling for one.

  • A common element of all the payroll tax “holidays” is to cut funding for Social Security.  Currently, each worker pays 6.2 percent of their salary into the Social Security trust fund (up to a maximum that is currently $106,800) and their employer makes a matching contribution. Under the President’s proposal, in 2011, workers would contribute 4.2 percent of their wages to Social Security rather than the usual 6.2 percent.
  • For someone who earns $50,000, that would result in an additional $19.24 per week in take-home pay.  But it would cost the Social Security Trust Fund $112 billion in lost contributions.

  • Diverting $112 billion from the Social Security Trust Fund for a “tax holiday” may sound like a good deal for workers, but it is bad business for the program and the millions of middle-class seniors depend on it—today and in the future.

  • Coupled with the payroll tax cut, the President has included in his tax compromise a provision that would reimburse the Social Security Trust Funds for the $112 billion in lost revenue stemming from the tax cut.  These reimbursements would come from the general fund of the Treasury, and while that may seem to be superficially reassuring, changing Social Security’s funding in this manner hasn’t been fully thought through and in fact poses a serious threat to the program’s continued existence.

  • The advocates for a tax “holiday” say to America’s seniors, “trust us, this tax holiday will last only for one year, and then funding for the program will revert to the old tried and true method.”

  • But if we’ve learned anything in the last few weeks, it’s that there is no such thing as a “temporary” tax cut.  If Congress is unwilling to allow tax cuts for wealthy Americans to expire, then why would it allow this so-called “holiday” end in one year?

  • The short answer is that it wouldn’t.  We can expect that any attempt to allow the payroll tax cut to end would be portrayed as a massive tax hike rather than the legislated end of the “holiday.” 

  • In fact, restoring the 2% payroll tax will be portrayed as a 50% “tax increase” on every American worker, making it politically difficult for Congress or the President to restore the funding at the end of 2011.  This is especially true in the face of a more conservative Congress, composed of Members who have already made clear their opposition to any revenue change that can be portrayed as a “tax increase.”

  • The problems with this proposal are compounded by the fact that workers will not be receiving any additional benefits for those reinstated contributions, making the increase difficult to justify. 

  • Extending the “holiday”, or making it permanent, would leave Social Security dependent on general fund revenues rather than workers’ contributions, which have so successfully funded the program since its inception in 1935.  Making matters worse, a permanent extension of this payroll tax cut would more than double Social Security’s 75-year projected shortfall.

  • Social Security would end up just like any other Federal program—dependent on the whims of the Congress for its funding.  Right now, we can say that Social Security hasn’t contributed one dime to the huge deficits that plague our Country.  

  • Instead, America’s workers have contributed more to the program than have been paid out in benefits.  As a result, the Trust Funds have assets worth nearly $2.6 trillion.  That’s trillion with a t.

  • All of this would change if Social Security were to become even partially dependent on general revenues.  The needs of America’s seniors would suddenly have to compete with the needs of other benefit programs, the needs of the Defense Department, and the needs of hundreds of other government programs that are funded from the general fund.

  • And it would become a target for deficit reduction, this time fairly so, since the program would be partly dependent on general revenue for the payment of benefits.

  • Finally, using general revenues to pay benefits would weaken the earned-right nature of Social Security.  This is a fundamental aspect of the program, and accounts in large measure for its enduring popularity.  Workers pay into the program in the belief that, when the time comes, they will receive benefits in return that reflect the contributions they have made during their working lives.  Using general revenues to fund Social Security, even partially, blurs this essential feature of the program.

  • So, for all of these reasons, we believe that the President and the Congress is making a fateful mistake in proposing this payroll tax “holiday.”  We believe that Social Security should continue to be funded as it always has been, from the contributions of American workers and their employers.

  • This shouldn’t be taken to mean that we do not support efforts to stimulate the economy.  Clearly, something needs to be done to encourage job growth and to reduce the alarmingly high rate of unemployment.  But not at the expense of Social Security.  Congress has found ways in the past to stimulate the economy without raiding the Social Security Trust Fund, and they should reconsider those alternatives, especially since many economists believe that those alternatives would be more effective in encouraging job growth than a “payroll tax holiday” would be.   

    Government Relations & Policy, December, 2010


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