Each day the payroll tax saga gets more complicated, and the public no doubt gets more confused. Bloomberg reporter Brian Faler and Remapping Debate’s Mike Alberti deserve loud shout-outs for their crisp and clear pieces this week about what could happen to Social Security if Obama and his allies win another tax holiday, touted as a way to restore America’s fiscal health.
Some Democratic lawmakers say that while President Barack Obama’s plan to cut payroll taxes may strengthen the U.S. economy, it may have some unintended fallout: weakening Social Security.
Democratic congressman Rush Holt, from New Jersey, told Bloomberg that he did not object to putting more money in people’s pockets, and there were lots of ways to do that—but Social Security was not one of them. He said it would be hard to support the White House plan. Rep. Jerry Nadler called the tax cut a “very bad” change to Social Security policy, but he added he would support it for another year or two anyway. A liberal congressman from New York taking a chance with Social Security? Complicated politics indeed!
Faler got right to the contradiction of the payroll tax cut. Obama is pushing it just as concern grows for the system’s long-term fiscal stability. Recall that the system will be unable to pay full benefits after 2036. Faler pointed out that Congress cut the payroll tax by two percentage points this year and wants to reduce it further next year, thus reducing the amount of revenue flowing into the system. The lost revenue, which goes to pay benefits of current retirees, is supposed to be made up from general tax revenues, a move that opponents of the tax cut say potentially severs the link between workers’ contributions and their right to benefits later on. Once general revenues are used, opponents say Social Security will be subject to the same political pressures as other programs.
The piece quickly moved into a discussion about Social Security fundamentals, which has been lacking in this year’s press coverage. How and why was Social Security funded with a payroll tax in the first place? It quoted Franklin Roosevelt, who knew that the connection between payroll contributions and the right to a benefit insulated the program from politics. Said Roosevelt:
We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions,” Roosevelt said. With those taxes in there, no damn politician can ever scrap my Social Security program. Those taxes aren’t a matter of economics, they’re straight politics.
Now those politics are a-changin’. Faler talked to Chuck Blahous, a former Bush administration official, who described the Obama tax cut as a “very fundamental transformation” in how Social Security operates. When you start funding Social Security with general revenues, he said, “you basically destroy any notion that people really paid for their Social Security benefits. We’ve got this political dynamic that says ‘well, if you don’t extend this, then you’re in favor of raising taxes on poor working people. If that’s the dynamic, then Social Security is in really severe trouble.”
Alberti’s piece showed how much trouble the program might be in if the payroll tax eventually becomes permanent, as many Beltway insiders believe. Alberti interviewed Joseph Thorndike, who directs the Tax History project at Tax Analyst, which publishes tax information. Thorndike noted that temporary tax cuts, or tax holidays, are rarely temporary. “We have an unpleasant tax record of applying temporary taxes that then just stick around. These temporary tax cuts are like vampires—they never die,” he said. Alberti dug into the clips and found that, last year, Tennessee Republican Bob Corker said that once the tax cut took effect “a year from now, when it expires, it’ll be portrayed as a tax increase.” And that’s what’s happened. “Now President Obama, lawmakers from both parties, and many members of the press, are indeed calling the return to normal rates a ‘tax increase,’” Remapping Debate reported.