A one third cut in employee FICA taxes could be trouble for Social Security

Is the Payroll tax holiday a trap?

A battle to resolve what to do after the “Bush tax cuts” were to expire led to an agreement between Republican leaders and President Obama introduced a stimulus tax cut involving Social Security payroll taxes.  For the first time in 27 years, the payroll tax was reduced from 6.2% to 4.2% for all workers. President Obama claimed that he wanted the reduction as an economic stimulus.  Of course, providing tax cuts to the lowest income workers will certainly provide a stimulus, but they will also divert $112 billion from the Trust fund. 

 Because of the temporary tax cut, for the first time in 27 years, the Social Security program will run a deficit.  The deficit will be the difference between payroll tax revenues, and the combination of benefit payments and the small expense of operating the program.  For the last 27 year Social Security has had yearly surpluses and the trust fund has accumulated $2.6 trillion dollars in surpluses.  Those surpluses have been borrowed by the federal government to cover deficits in the general fund.  Here’s the catch, the money is to be repaid to the trust fund from general revenues, but the government has had to borrow 12 trillion dollars over the last 30 years, so it will have to borrow in the commercial bond markets in order to reimburse the trust fund.

Now, with the Republicans in control of the House of Representatives, just how likely are they to default on the reimbursement.  If you have no idea, try “VERY LIKELY”.  For decades, the Republicans have insisted that there is no trust fund; they claim it is a fiction, so why would they intend to repay money to a fund that they claim does not exist?  The trust fund is the Achilles tendon of the Social Security program.  Cut it and the program is crippled and ripe for the kill.   If there was to be a payroll tax holiday, it should have been paid for from cuts in income tax withholding, not from FICA premiums. 

The payroll tax holiday is set to expire in December 2011, so won’t we see a repeat of the same arguments about taxation that we saw this year?  Won’t the Republicans insist on extending those cuts and further weakening the program?  Their dream, as expressed by Newt Gingrich back in the 1990s, is to see programs like that wither on the vine, starved to death from lack of funding.

The President needs sound advice regarding what is needed to preserve Social Security for future generations.  He will not get it from his deficit reduction committee.  They implied that Social Security is part of the deficit problem even though the program has provided surpluses, not deficits, to the consolidated budgets. 

See Professor David J. Ekerdt’s column in the Christmas day edition of the Kansas City Star at the following website:    http://voices.kansascity.com/entries/social-security-has-strong-future/