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Some see danger in changing Social Security’s funding

Another Social Security tax cut, intended to spark the sluggish economy, seems to be in the works. But some Social Security policy experts and Democratic members of Congress see fatal flaws in President Obama’s proposed tax cut.

Another Social Security tax cut, intended to spark the sluggish economy, seems to be in the works.

But the short-term boost for workers could create even more problems for a giant entitlement program already facing a long-term financing shortfall.

The tax cut is a vital ingredient in President Barack Obama’s jobs bill. On the campaign trail in Pennsylvania last week, Obama touted the proposal as a tax break for “middle-class families who are likely to spend this money now and get the economy moving again.”

For 2012, Obama wants to cut the tax, normally 6.2 percent on both the employer and the employee, to 3.1 percent. The tax cut for businesses would apply on the first $5 million in wages paid. The proposal builds on the 2 percentage point payroll tax reduction that is in effect for 2011.

With average earnings at about $790 a week, the payroll tax cut would amount to $24 a week in additional take-home pay, compared to what the average worker would have made if the tax were at its normal 6.2 percent rate.

Replacing lost revenues
The tax cut would cause a $289 billion loss in Social Security revenues, which would be replaced by general tax revenue funds transferred from the Treasury.

Some congressional Republicans seem inclined to support the idea, but some Social Security policy experts, Democratic members of Congress and Republican presidential contender Mitt Romney see fatal flaws in the payroll tax cut.

Charles Blahous, a senior fellow at the Mercatus Center, a free market-oriented think tank at George Mason University, said members of Congress have not adequately debated the merits of this proposal.

“There hasn’t been nearly enough attention to this,” he said in an e-mail interview Monday night. “The idea that Social Security’s payroll tax can be cut for stimulus purposes without effects on Social Security is absurd.”

He added, “Only two things can happen, either Social Security goes insolvent earlier, or we continue funding the program with general revenues, undermining the basis of Social Security’s longstanding bipartisan support — the idea that it’s not welfare, but a benefit earned by worker tax contributions.”

Supposed to be a self-financing system
Blahous said, “Social Security is represented to the public as a benefit that workers earn with their payroll taxes. The foundational idea of the program, and the reason that it has a separate trust fund, is that it is supposed to be self-financing. Over the long run, the benefits it pays are supposed to be no more and no less than the revenues that it generates.”

He called transferring general Treasury funds into Social Security a form of “accounting gimmickry.”

He emphasized that “there are no tax payments behind these general revenue transfers; because they were issued to cover for a payroll tax cut, they are simply an issuance of debt that our kids have to pay for, accompanied by an accounting pretense that we paid something that we didn’t.”

Sen. Joe Manchin, D-W.V., who is up for re-election next year, also opposes the payroll tax cut arguing that the revenue loss "hits Social Security right smack in the eye."

Democratic critics of the program worry that Obama might be undermining what has been a signature Democratic program since Franklin Roosevelt and Congress created it 76 years ago.

Step toward dismantling Social Security?
In a letter to Obama last July, 62 House Democrats said “a payroll tax cut may be used as the first step in a larger battle to fundamentally dismantle Social Security.”

They added, “The current cut in Social Security contributions must be allowed to expire as scheduled (on Dec. 31, 2011). History instructs that any tax cut is politically difficult to terminate.”

Some Democrats in Congress say that the current payroll tax cut hasn't had the stimulative effect that its proponents promised. And with the 2012 elections a year away, they think it doesn't help the president politically to be adding to the national debt when many Americans are trying hard to pay off their own home equity loans and other debts.

The skepticism about the idea is shared by Romney. When asked about the idea in in last week’s GOP presidential debate, he said, “What it takes to create jobs is more than just a temporary shift in a tax stimulus.”

Asked whether he'd oppose or support Obama’s proposal, he replied, “Look, I don't like temporary little Band-Aids. I want to fundamentally restructure America's foundation economically.”

But the idea does have its supporters.

Paul Van de Water, a senior fellow at the liberal-leaning Center on Budget and Policy Priorities, said, “The payroll tax holiday is providing needed stimulus to the economy, and Social Security is being fully protected against any loss in income. Since the economy remains weak, extending the payroll tax holiday for another year makes sense.”

But he cautioned that the longer the payroll tax reduction is continued “the more difficult it might be to restore the tax to its original level, and failing to do so would blow a huge hole in Social Security’s finances.”

Altogether, including its proposed spending on hiring public employees, repairing schools and building highways, Obama’s jobs bill would add $288 billion to the deficit in fiscal year 2012 and another $129 billion to the deficit in 2013.

Over ten years, Obama proposes to offset this with tax increases on people with incomes of over $200,000 so that by the end of the ten-year period his plan would slightly reduce cumulative deficits.