Wednesday, February 22, 2012

Does the Payroll Tax Cut Affect the Social Security Trust Fund?

On February 19th, the following conversation took place between interviewer Jake Tapper and Robert Gibbs on ABC's "This Week":

TAPPER: The president got something of a political victory this week when the House and Senate came to an agreement on the payroll tax extension, but it's not paid for, the $100 billion, so that payroll tax money will not be paid into the Social Security Trust Fund. One member of the president's own party called this bill "a devil's deal" and went on the say this.


HARKIN: I'm dismayed that Democrats, including a Democratic president and a Democratic vice president, have proposed this and are willing to sign off on a deal that could begin the unraveling of Social Security.


TAPPER: That's quite an ad against the president's re-election campaign from Democratic Senator Tom Harkin. Is this the unraveling of Social Security?

GIBBS: No, I strongly disagree with that characterization. This does not in any way threaten the livelihood of Social Security.

TAPPER: A hundred billion dollars is not going into the trust fund.

GIBBS: What it does do is help our economy get stronger at a time in which middle-class families we know continue, Jake, to struggle greatly with the high cost of living these days. And I think it was an important step. And I'm glad that Republicans in Congress accepted the president's position that we can't raise taxes on the middle class right now. It was an important step. It will help continue our economic recovery. And it in no way threatens the livelihood of Social Security.

The above is excerpted from this transcript on the ABC web site. Jake Tapper appears to believe that the reduced funding caused by the extended payroll tax cut will reduce the funds flowing into the Social Security trust fund. He states "payroll tax money will not be paid into the Social Security Trust Fund" and "a hundred billion dollars is not going into the trust fund". It's unclear if Robert Gibbs believes this since he only states that this "in no way threatens the livelihood of Social Security".

In any case, the same belief is expressed in this transcript of an interview between interviewer Judy Woodruff and Nancy Pelosi that was aired on February 16th on the PBS Newshour. Following is an excerpt:

JUDY WOODRUFF: Do you worry though that this does take money out of the Social Security trust fund and that it may never be fully be refunded, repaid?

REP. NANCY PELOSI: No, I don't worry about that. I think that this should be the last year for it.

I do believe that other factors in economic growth are weighing in now and we see an improvement in our growth possibilities but I think one or two years, no, the trust fund can handle that.

In fact, the payroll tax cut will have no direct effect on the Social Security trust fund. Following is an except from an LA Times article:

To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year.

The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office.

This agrees with an article on the White House web site titled Will Extending the Payroll Tax Cut Affect Social Security? No.. This article was posted on December 9th, presumably for the two-month extension. Following is an excerpt:

While more money stays in workers’ paychecks, the law specifies that Social Security receive every dollar it would have gotten even without the payroll tax cut. This happens by automatically transferring resources from the government’s general coffers to the Social Security Trust Fund. And indeed, the chief actuary of the Social Security Administration has confirmed that the payroll tax cut would have no impact on the Trust Fund.

So what was Senator Harkin talking about in the video clip excerpted on ABC's "This Week"? A Huffington Post article mentions his statement that this deal "could begin the unraveling of Social Security" but continues as follows:

Harkin argued that Social Security had always been strong and protected because it was funded by its own dedicated tax stream that ensured every American would be guaranteed a basic income in their retirements, and that the program added not "even one dime to the deficits or the national debt."

But he said now that Congress was going to pay for this cut with borrowed money from the general treasury funds, the best argument of the program's defenders was gone.

"With this bill, we can no longer say that. We can no longer say that Social Security doesn't contribute to the deficit," Harkin said.

He argued that a far better plan would have been to simply grant working Americans rebates on their income taxes, the way Presidents Obama and George W. Bush had done in recent years.

It would be true that a rebate on income taxes would likely be easier to end. As stated in the aforementioned LA Times article, "with every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon".

That seems to be a very common problem with "temporary tax cuts". They are very difficult to end as they are invariably depicted as major tax increases. The same problem occurred when the Bush tax cuts were scheduled to expire in 2011. This would seem to be a good argument NOT to implement temporary tax cuts that we cannot afford to make permanent, at least not without a credible plan for ending them.

In any case, it does seem to be a valid concern that the payroll tax cut could weaken Social Security by bringing into question its status as a self-funded program. But it clearly does not affect the Social Security trust fund or the payment of benefits directly.

Note: There is a discussion of this post at this link.

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About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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