Liberals fear payroll-tax holiday will undermine Social Security

Liberal lawmakers in both chambers are hammering the Obama administration for pushing a payroll-tax holiday they say threatens Social Security.

The lawmakers fear Obama’s proposed 2012 payroll-tax break — included as part of his newly released jobs package — could become permanent, stealing from Social Security’s lone funding stream and eventually eroding senior benefits.

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“Over a period of years — if you do it one year, and then you do it two years, and then you do it three years — then it becomes permanent,” Sen. Bernie Sanders (I-Vt.) told reporters Wednesday in the Capitol. “And somebody’s going to say that if you don’t do it, then you’re raising taxes.”

Rep. Peter DeFazio (D-Ore.) sounded a similar warning, noting that the loss of revenue created by the payroll-tax holiday makes Social Security necessarily reliant on general funds. That, in turn, makes the program much more susceptible to cuts, he added, particularly in a political environment in which deficit reduction has become a top priority.

“Suddenly, someone will say, ‘Wait a minute, we can’t afford to subsidize this thing anymore,’ and the Republicans will say, ‘Well, you can’t raise the tax,’” DeFazio said.

The current tax holiday slashes workers’ payroll taxes from 6.2 percent to 4.2 percent — a real reduction of 32 percent. The benefit, which is slated to expire at the end of 2011, is estimated to reduce federal revenues by roughly $112 billion — money the government will have to borrow to refill the resulting hole in the Social Security Trust Fund.

As part of his new jobs package, Obama has proposed to increase the size of the break, dropping workers’ payroll tax rates from 4.2 percent to 3.1 percent through 2012.

The White House also wants to extend the break to businesses, which aren’t receiving the 2011 benefit. The combination of payroll proposals would reduce government revenues by roughly $240 billion, according to White House estimates.

The issue has flipped the normal politics of Washington on its head, with many Republicans — who are urging sweeping tax cuts as economic stimulus strategy — nonetheless opposed to Obama’s payroll-tax holiday.

“It is a horrible idea,” Rep. Pete Sessions (R-Texas) said Friday.

Meanwhile, Obama has adopted the popular GOP argument that allowing a tax cut to expire constitutes a tax hike — a message he delivered last week in challenging Republicans to support his payroll-tax cut.

“If we allow that tax cut to expire — if we refuse to act — middle-class families will get hit with a tax increase at the worst possible time,” Obama said last Thursday night in his address to a joint session of Congress. “We can’t let that happen.”

The odd dynamics weren’t lost on DeFazio. 

“A little ironic, isn’t it?” DeFazio said. “What he’s done is create the [question] of, ‘What do we do after that?’

“If this becomes permanent, then Social Security would be exhausted in 2021, instead of 2037. Now, that’s a big problem.”

Rep. Ted Deutch (D-Fla.), another critic of Obama’s payroll-tax provision, said Wednesday that he’s been in contact with the White House about finding other ways to get money into consumers’ pockets without draining Social Security’s coffers. 

“We’re going to continue to push for that,” he said.

Not all Democrats have the same concerns. Sen. Barbara Boxer (D-Calif.), for instance, was quick to note that Obama’s proposal requires that Social Security’s lost revenues be backfilled from general funds.

Rep. Barney Frank (Mass.), the senior Democrat on the House Financial Services Committee, also dismissed the idea that the tax holiday would evolve into a permanent vacation. 

“Our deficit stresses are too much for that,” Frank said.

He added that he would have preferred another strategy for strengthening the economy, but that the tax-holiday extension “is more stimulative than nothing, so I’m supporting it.”

Sanders and DeFazio say they have a better way. The pair introduced legislation Wednesday to expand the level of income subject to the Social Security tax — currently capped at $106,800 — to include income higher than $250,000. The lawmakers say the proposal would fully fund Social Security for the next 75 years — 38 years longer than the program is estimated to remain fully solvent under current formulas.

“We have to guarantee that we will continue this program as far as anyone can predict, and this one simple step will actually do that,” DeFazio said. “It’s fair. It fixes the program forever. No more discussion about raising the retirement age. No more discussion about cutting benefits. No more discussion about privatization. Just fix the existing Social Security compact and ensure it for all future Americans.”

Sanders noted that Obama himself endorsed the idea as a White House contender.

“While some of you may think that this is a terribly radical idea, let me confess that we stole this idea from a candidate for president of the United States,” Sanders said. “You may remember his name. [He] was called Barack Obama.”

The issue is already becoming a topic of contention on the presidential trail, after Texas Gov. Rick Perry (R) described Social Security as a “Ponzi scheme.”

Bolstered by public opinion polls indicating that Social Security remains highly popular with voters, Democrats have pounced on Perry’s remarks.

“A Ponzi scheme is a crime,” noted Boxer, a supporter of the Sanders-DeFazio bill. “So [Perry is] saying Social Security is criminal.”

A CNN poll this week found that nearly 7 in 10 Republicans disagree with Perry’s criticism of Social Security.

Updated at 8:10 p.m.