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 vitally important economic lifeline for millions of America 's most vulnerable people, including aged individuals and persons with disabilities, as well as their spouses, dependents, and survivors. Over 54 million Americans will receive benefits from this program in 2011, and about 156 million workers will contribute to it in anticipation of the day when they, too, will qualify for Social Security.

How Social Security is Funded

Throughout its history, Social Security has been almost exclusively funded by contributions from workers and their employers. The current tax rate is 6.2 percent on earnings, up to a taxable maximum that currently stands at $106,800. Employers contribute an equal amount. These contributions are the life blood of the program, and are used to pay benefits for current beneficiaries and the costs associated with the administration of the program. Any income in excess of current need is deposited in the Social Security Trust Funds, which have assets of about $2.6 trillion.

Beginning this year, the Congress enacted a payroll tax cut that temporarily reduced the amount contributed to Social Security by workers to 4.2 percent of their earnings. Employer contribution rates were unchanged. The President is now calling on the Congress to deepen and extend this tax cut by cutting employee contributions in half for one year. In addition, the President is proposing to cut payroll taxes in half for employers (for the first $5 million in payroll) and to eliminate it altogether for new hires and wage increases. The National Committee to Preserve Social Security and Medicare believes that these tax cuts pose a grave threat to the program.

There is no such thing as a temporary tax cut. When Congress first enacted the payroll tax cut last December, advocates said the cuts would last only for one year. Now Congress is being asked to extend the cuts for another year and even to extend them to employers. Extending and expanding the payroll tax cuts greatly worsens the situation, casting doubt on whether Social Security will ever be restored to its long-established system of self-financing.

 Tax cuts threaten Social Security's long-term independence. A year ago we said that the 2 percent payroll tax cut would be the beginning of the end of Social Security as we know it. We argued that the payroll tax cut, coupled with legislation that substitutes the trust funds' lost revenue with general fund transfers, would leave Social Security dependent on general revenue and the actions of Congress for its funding rather than workers' contributions, which have so successfully funded the program since its inception in 1935. Extending and expanding the holiday further endangers Social Security's future.

Payroll tax cuts will throw Social Security into the deficit debate. Supporters of Social Security have always been able to maintain that the program has not contributed one dime to the huge deficits that plague our country. That will change if Social Security becomes even partially funded with general revenues. The needs of America 's seniors would suddenly have to compete with other programs, such as funding for defense and education. In time, Social Security itself would become a target for deficit reduction.

Changes in funding would undermine support for the program. Using general revenues to pay benefits, even if done only in part, would weaken the earned right nature of Social Security. This is a fundamental aspect of the program, and, in large measure, accounts 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 revenue to fund Social Security weakens this essential feature of the program.

The expansion to employers is especially poorly targeted. Although the President has called his proposed holiday for employers a benefit for small business, in fact much of the benefit would go to America 's largest companies, many of whom already have significant reserves they are not investing in job creation.

NATIONAL COMMITTEE POSITION

• Putting Americans back to work is critical to our economic recovery. It's unfortunate that for most of this year Washington 's attention has been diverted to deficit reduction rather than finding ways to stimulate our still flagging economy, which will itself reduce the deficit.

• We applaud President Obama for refocusing our national attention to where it should be - economic recovery - while offering relief that many Americans desperately need. We agree wholeheartedly with the President that the time to act is now and we hope Congress will move quickly to make job creation priority # 1.

• However, we do not believe that extending or expanding cuts to Social Security's revenue funding is the best way to stimulate the economy and promote job creation. The Tax Policy Center has reported that the wealthiest 40 percent of households benefit most from a payroll tax cut. Both the Center on Budget and Policy Priorities and the Center on Economic and Policy Research agree that extending the Making Work Pay tax credits would do more to boost the economy than extending or expanding payroll tax cuts.

• Social Security is paid for, earned by and promised to American workers. We call on the President and the Congress to reaffirm the fact that Social Security has been, is, and will continue to be, a self-financed insurance program; and that temporary payroll tax cuts do not constitute a precedent that would undermine this principle.

• If the payroll tax holiday is extended, Congress and the President should provide guarantees that their short-term changes will not undermine the financial integrity of Social Security. This program should be protected - now, and forever.

Government Relations and Policy, October 2011