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What the Payroll Tax Cut Means for Social Security

A sound idea — or a slippery slope?

The deal being hammered out this week between the White House and Republicans in Congress appears to have something for everyone. It extends the Bush-era income tax cuts at every income level for two years, a top GOP priority. President Obama wins a 13-month extension of benefits for the long-term unemployed, which Republicans had been blocking.

And, among other provisions, both sides have agreed to a surprise one-year cut in the payroll tax.

The payroll tax, which supports Social Security, is currently set at 6.2 percent for workers, matched by employers. If enacted, the deal will reduce the worker's share to 4.2 percent in 2011; the employer's share will be unchanged.

For a worker earning $50,000, the tax will drop from $3,100 to $2,100, allowing the worker to keep (and hopefully spend) $1,000 more in take-home pay.

According to the White House, the one-time, temporary cut will put about $120 billion into the pockets of more than 155 million workers.

In a statement released Dec. 7, the White House predicted that the tax cut "will have a major impact on jobs and growth — creating substantial numbers of jobs. It is widely recognized by economists across the political spectrum as a high bang-for-the-buck way to boost growth and was cited by both major deficit reduction commissions as consistent with long-term fiscal discipline."

'No impact on Social Security solvency'

The White House maintains that the $120 billion lost to Social Security's trust fund will be paid back by a transfer of general tax revenue, "ensuring no negative impact on Social Security solvency."

But clearly there will be new pressure on the available pool of general tax revenue, unless the $120 billion generates so many new jobs so fast that an army of newly employed workers fills the coffers of the Internal Revenue Service with unanticipated tax revenue. No one expects that to happen, at least not quickly.

So the government would have to borrow to make Social Security whole. That, in turn, would make the short-term deficit worse. So Congress might not vote to replenish the trust fund.

And 2012 — when the payroll tax would climb back to 6.2 percent — is a presidential election year. If we're in a recession or even a weak recovery, will politicians advocate raising taxes?

True, it's not a tax increase, it's just restoring a previous tax level. But that's a nuance likely to get lost in the fog of election-year warfare. It's easy to picture incumbents being savaged for trying to take money out of the taxpayers' pockets. So there's at least a chance — maybe more than a chance — that the reduced payroll tax rate could become permanent, some experts say.

Could the cut become permanent?

Nancy Altman, codirector of Social Security Works, describes a worst-case scenario.

"Given that the present Congress is unwilling to roll back the Bush tax cuts and raise even a nickel in additional taxes from millionaires," she says, "it's hard to believe that a more conservative Congress, in an election year, will increase the payroll tax from 4.2 to 6.2 percent — a 30 percent increase — on the very first dollar earned by virtually every single worker in the country." She thinks the cut could well become permanent.

If that happens, Social Security’s long-term shortfall could double over 75 years, she says, and political pressure to downsize the program could mount. That could lead to converting Social Security from a universal insurance program to a welfare program, with the numerous drawbacks of programs for the poor, including low public support.

If this scenario unfolds, says Altman, "it's good-bye, Social Security."

At this point it's much too soon to know whether the curtain will really fall on Social Security after 75 years. But there's little doubt that reducing the payroll tax carries a risk. It could prove to be the opening wedge in a new effort to change the face of Social Security.

Thomas N. Bethell is a Washington writer and policy analyst.

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