V I E W P O I N T

Extending the Payroll Tax Cut is a Bad Deal for Social Security and for America

Social Security is one of the most successful income security programs in our nation's history. It is a vital lifeline for millions of America 's most vulnerable citizens, including retirees and persons with disabilities, as well as their spouses, dependents and survivors. Over 54 million Americans will receive Social Security benefits in 2012, and about 156 million workers will contribute to the program's finances.

How Social Security is Funded

Throughout its history, Social Security has been funded almost exclusively by the payroll taxes paid by workers and their employers. For years, the tax rate has been 6.2 percent of earnings, up to a taxable maximum that in 2012 is $110,100. Employers contribute an equal amount. These contributions are used to pay benefits and related administrative costs. Excess income for any year is deposited in the Social Security Trust Funds, which currently have assets of about $2.6 trillion.

Beginning last year, the Congress enacted a payroll tax cut that reduced the amount contributed to Social Security by workers to 4.2 percent of their earnings. The purpose of the tax cut was to stimulate growth in the economy by increasing workers' take-home pay. The employer's tax rate was not changed. Now the Congress has agreed to extend the Social Security payroll tax through 2012.

National Committee Concerns

•  From its inception little more than a year ago, the National Committee to Preserve Social Security and Medicare has expressed grave concerns about the wisdom of cutting the Social Security program's funds as a means of stimulating the economy. When we first expressed our opposition to this idea, we thought it was bad Social Security policy and that it would be very difficult, if not impossible, to end this tax cut.

•  It's bad Social Security policy because it undercuts the essential principles upon which the program rests. First, it undercuts the concept that Social Security benefits are an earned right that stems from the contributions that workers make to the program. Second, it undercuts the principle that Social Security is funded exclusively by workers' contributions, and thus does not contribute to the deficits that continue to challenge this country.

•  Unfortunately, events have borne out our concerns about the permanence of this tax cut, as the Congress has now extended it through the first two months of 2012 and now is attempting to extend it through the remainder of the year.

•  Don't get us wrong. The National Committee appreciates the importance of finding some means for stimulating the economy, especially given the fact that the recovery that we've seen in recent months has been weak, and the risk of slipping into another recession continues to hang over the economy. Clearly, the government must do something to strengthen the economy. We are concerned, however, that the approach that has been adopted is not the best way to accomplish this end. More troubling, we are convinced that using Social Security in this manner constitutes a long-term threat to the program.

•  We agree with the Center on Budget Policy and Priorities and the Center on Economic and Policy Research that there are more effective ways of stimulating the economy. For example, extending the "Making Work Pay" tax credits would do more to boost the economy than extending. What is more, it is a less complex and more progressive method of stimulating the economy, and does not threaten Social Security's integrity.

•  We acknowledge that the Congress has been careful to make sure that the payroll tax cut does not directly weaken the financial integrity of Social Security by replacing lost funds with general revenues. Still, the perceptual problem exists, and we are concerned that those who want to weaken or change the program will use this change in perception to the detriment of current and future seniors.

National Committee Position

•  Social Security is paid for, earned by and promised to American workers. We ask that the Congress reaffirm the fact that Social Security has been, is, and will continue to be self-financed, and that any change is temporary and does not constitute a precedent to be used to erode support for the program or to justify its privatization.

•  We ask that any legislation that extends the payroll tax cut through the entirety of 2012 include language that explicitly affirms the intent of the Congress to allow the provision to sunset at the end of the year. We also ask that all Members of Congress explicitly affirm the temporary nature of any extension that they support.

•  Finally, the National Committee is especially troubled by the fact that some in the Congress want to use cuts to Medicare to help pay for an extension of the payroll tax cuts. It is ironic and extremely troubling that anyone would consider cutting Medicare in order to pay for a tax cut from which few seniors benefit.

•  We ask that all Members of Congress disavow any proposals that would cut benefits to Social Security and Medicare beneficiaries in order to pay for an extension of the Social Security payroll tax.

Government Relations and Policy, February 2012