The unkindest cut of all

Unbelievable as it seems, that may be what just happened. In a compromise worked out with the Republican leadership, a Democratic president has proposed and a Democratic Congress has approved a partial “payroll tax holiday” for workers. In 2011 the 6.2 percent payroll deduction that workers pay to support the Social Security system will be reduced to 4.2 percent. This move has the potential to undermine the long-term viability of Social Security.

The payroll tax holiday is supposed to expire in one year. But the inability of Congress to allow the Bush tax cuts to expire for the very richest 2 percent of households suggests that this may not happen. Democrats are unlikely to stand up next year to Republican claims that a return to a 6.2 percent payroll tax rate is a nearly 50 percent increase in taxes on workers. Thus the reduction is likely to persist into the future.

The tax compromise makes up the shortfall in 2011 of $112 billion in Social Security’s receipts due to the tax holiday out of general tax revenue. If the goal were simply to provide a stimulus to the economy, Congress could use this money to send a check to every worker and every person on Social Security. This convoluted means of getting a little extra money into the pockets of working people suggests that Social Security is being set up and will be in big trouble when 2012 rolls around.

In future years if the lower tax rate persists, Social Security will have to turn to the Treasury for financial support. The tax deal puts Social Security on the table with the estate tax, tax breaks for business expenses, and the Alternative Minimum Tax “patch” – essentially making it just one more bargaining chip in the perennial horse trading among politicians over the federal budget and threatening the program’s survival. Having part of the funds for Social Security come from general tax revenues opens up a further avenue for those who are hostile to the program to attack it.

For 75 years, the Social Security program has been financed exclusively by payroll taxes dedicated to this purpose. Workers know their contributions finance their retirement benefits, and this has proven to be a significant bulwark against the privatization of Social Security. The partial payroll tax holiday is not just a threat to the financial health of Social Security; rather it undermines the link between contributions and benefits that has been the rationale for the program for generations. Weakening this bond is a bad idea at any time. But in the context of an incoming Congress likely to favor tax incentives for private saving over using general tax revenues to support Social Security, this proposal clearly endangers the solvency of the system. A one-year tax holiday paid for by the Treasury is not a danger. But Democrats will have to ensure that this holiday really does end when it is supposed to so a program that has served generations of American seniors so well will be there for our grandchildren.

Rep. Rush Holt represents the 12th Congressional District of New Jersey. Eileen Appelbaum is Senior Economist at the Center for Economic and Policy Research.