Would Obama’s payroll tax cut hurt Social Security?

September 9, 2011

The Congressional Super Committee hasn’t even started cutting Social Security, but advocates are already expressing concern on a different front: the payroll tax cut extension proposed last night by President Obama as part of his jobs plan. Those payroll taxes fund the Social Security program.

The President asked for a $175 billion one-year extension and expansion of the employee payroll tax holiday now in place, halving the tax rate to 3.1 percent in 2012. He also proposed halving employer payroll taxes to 3.1 percent for the first $5 million of payrolls in 2012. The president also wants a complete payroll tax holiday that would apply when companies grew their payrolls by up to $50 million in a year by hiring  new workers or raising the salaries of existing workers.

These cuts in the Federal Insurance Contributions Act tax (FICA) may be one of the best available stimulus options in the current political climate, and they will have a positive economic impact. An analysis by The Center for Budget and Policy Priorities notes that the cuts already in place make a substantial difference in the spending power of middle class families, and that allowing them to expire at this time would be very negative for growth:

Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce all paychecks starting on January 1, withdrawing needed support from the still-weak economy. The measure, part of the tax cut-unemployment insurance deal between President Obama and Republican leaders, reduces the employee share of the Social Security payroll tax, boosting workers’ take-home pay by an estimated $120 billion in 2011. The tax cut is worth $934 to the average worker.

And Moody’s Analytics estimates that allowing the payroll tax cuts to expire would reduce GDP growth by one percentage point in 2012, translating into one million fewer jobs by the end of next year.

But Social Security advocates worry that these temporary payroll tax cuts will never be restored. “The problem is, it is very easy in our current political climate to cut revenue and very hard to increase it,” says Nancy Altman, co-director of the Strengthen Social Security coalition and author of The Battle for Social Security, an excellent history of the program and its politics.

“Look at the controversy over ending the Bush tax cuts, which would only affect a small portion of taxpayers,” Altman says. “In this case, if you propose restoring the payroll tax down the road, you’d have to double the rates on workers making minimum wage. This is being sold as temporary, but it’s not likely to work out that way.”

The current and proposed FICA tax cuts don’t directly affect the long-term health of Social Security, because the revenue that normally flows direct to the Social Security Trust Fund is being reimbursed out of general revenue. But that so-called “hold harmless” provision now gives Social Security a direct role in rising deficits for the first time. Up until now opponents have sought to tie the program to the deficit by arguing that the Social Security Trust Fund is just a collection of worthless IOUs, but those arguments don’t hold water.

The FICA tax may not be the ideal way to fund Social Security. As Altman notes, the tax is regressive in that it collects tax on the first dollar earned by workers, and is capped at $106,800 in income (See: Warren Buffett). But it’s an approach all sides have been able to live with from the program’s inception in the 1930s.

“In fact, it was the conservative approach at the time of Social Security’s inception,” Altman says. “Business and labor could both live with it. Now, we’re talking about changing the funding for a program that was worked well for 76 years without any thoughtful discussion of what that means. Is it a good idea? A bad idea? We’re in uncharted territory.”


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I agree with your assessment 100%. As a 48 yo woman, I’ve paid into these so called “entitlement” programs since I was first employed at 16. By the time I do finally retire, I’m pretty confident I will get absolutely nothing for my contributions. I think the 76 year old system is working just fine, it’s just a sticky finger issue for those who would love to raid the program to non-existence for whatever reason.

Posted by JahLove63 | Report as abusive

I am a Democrat but it’s wrong of President Obama to do this to our social security trust fund. He should be honest with the American people and tell them that this payroll tax cut takes money from going into the social security trust fund, something the Republicans love because they don’t want social security anyway. So President Obama is weakening our social security trust fund and once again cowtowing to the Republicans. President Obama – why not reduce the middle class federal taxes instead? Why are you taking away from our social security trust fund? Why are you choosing to harm your constituents? Tell the American people the truth about this payroll tax cut please!

Posted by Syofie | Report as abusive

…from the article: “reduces the employee share of the Social Security payroll tax,[1] boosting workers’ take-home”

………hahhaha, ya & the part they don’t tell ya, is that it also reduces the employer share of the Social Security payroll tax, {1a} boosting employers’ profit ( you know the matching part, that employers must match the employee’s part, both of which are reduced for years now, many years, this is not a new concept!

…….. the other part that they don’t tell ya is: by mandatory participation for new hires autoenrolled for less FICA taxes, the employee’s & employer’s FICA tax is not only currently reduced with cash in your pocket now (much like a bribe), upon retirement, the employer is held ‘blameless’ and the employee by law, and shortsightedness has not contributed much at all to their SS benefit account, this is why many people have the position ‘I doubt there will be anything left of SS when I retire’ and they would be correct, it has been underfunded for years, an now the ‘lawmakers’ are chopping another blow into the foundation of the funding: employees & employers matching contributions.


Posted by wild | Report as abusive

Totally agree, the greatest threat to our country is the ability to print money without voter approval.

Posted by gordonm | Report as abusive

Mr. Obama and Congress have dragged Social Security into their fight over deficit reduction and juvenile pledges to never increase taxes. Today, Social Security is solvent, but reducing the payroll tax is not going to help it stay that way. All these economic theories about stimulus, spending and no tax increase forever don’t seem to hold up over time. Since the Republican Revolution of 1994 (and decades before) when the Republicans took control of the House and Senate, they have argued that lower taxes create jobs. Well, we are over ten years into the Bush tax cuts, Republican tax cuts, and where are the jobs? It’s all smoke and mirrors. Mr. Obama is doing the same thing with his tinkering with Social Security. He is just taking it from current and future Social Security recipients. He trying to sweep it under the rug and move tax increases down the road. Do these politicians really think that Americans don’t understand that you can’t work forever, and retirement will become mandatory whether an individual wants it or not. Young people better get their faces out of those endless distraction devices and wake up to see what is head for them. Mr. Obama wants to do something creative, then he should allow a tax holiday for more than a trillion dollars of corporate profits sitting offshore, but allowing this money to come home at a tax rate lower than the current 35% corporate tax rate. Once he gets the money in tax revenue, then he can distribute to Social Security recipients and other taxpayers and let them spend it. Yee, even the mindless Republican voters would go along with that.

Posted by Jaay | Report as abusive

Just give everyone back what they paid in, and cancel social security. Problem solved.

Posted by LBCarl | Report as abusive

ok LBCARL…lets just pretend for your sake that SS is scraped &…hummm ‘give back’ what…??? oh ya ‘give back’ what they paid in, now thats the part that won’t fly, even with current inflated & practically worthless USDollar!, even with the inequity currently within the USJustice system (that would be judge such matters & blindly bring class action cases as ‘lucky to get 7% upon dissolution of SS’)…this is about TAKING not giving back. LBCARL, this leadership & past leadership, was never about ‘give back’…its about ‘taking’, subtile but ‘taking’ just the same. Hummmph, using your logic LBCARL…I’ll pretend for a moment that the USmilitary, could also be problem solved also!…hahha cancel US military & ‘give back’ what everyone paid in, but then what…oh what would we do with all those unemployed, world traveling, gun toteing, jet flying, military types? There was a time in this country, that ‘the public’ had noooooooo problem defending their country, (without a standing army) and gave lives to accomplish just that, now with this leadership and past leadership, ‘defense’ is just another name for the privatized entity, that enforces deadly missions of TAKING. (didn’t you notice the world record military budgets, year after year 850billion (and thats just to get started budget)….its about the TAKING.


Posted by wild | Report as abusive

The only thing more tragic than the lies being told about Social Security is the inability of its defenders to understand the program.

Social Security tax is not regressive. Social Security is a highly progressive insurance plan. Calling it regressive just because everyone pays the same premium is about stupid.

FICA was carefully thought through by the people who designed Social Security and the payroll tax was insisted upon by Roosevelt who understood that it was important that Social Security not be welfare.

There is no need to change that. Workers can continue to pay for their own social security forever, as they always have. They might need to raise their own tax one half of one tenth of one percent per year to cover their own higher costs due to longer life expectancy.

Cutting the payroll tax is a cynical move on the part of the President to weaken Social Security so it will be easier to kill down the road. Don’t be fooled. It is not Social Security that will be “contributing to the deficit,” it is the damned “tax holiday.”

The tax holiday puts about 400 dollars a year into the pocket of a low earner, and about 2 thousand dollars a year into the pocket of someone earning 100k. Someone who is more likely to “save” the money than to either spend it or invest it (in what?)

There are better ways to stimulate the economy.

And do you really trust Moody’s?

Posted by coberly | Report as abusive

Obama says that cutting payroll taxes to 3.1% for employee and employer will cost only $200 billion. This is fuzzy math because 3.1%+3.1%=6.2% = 50% of all payroll taxes.
This means that Social Security will be underfunded by $400 billion.

If this passes, in 3 years(Social Security will be totally destroyed. No more: SS payments; Disability payments; Orphans payments; Medicair/Medicaid payments.

Posted by PhilnTX | Report as abusive

While Obama focuses his scorn on the Bush Tax cuts, he pushes for another year of reduced FICA funding. His justification being that, if not extended, the average taxpayer’s tax burden will see a $934 increase.

Hold the phone, Mr. President. If the Bush cuts are not extended, a taxpayer earning $60K will see an increase of $1500.

Here’s an idea: how about having our government promote a business-friendly environment, because more jobs means more tax payers, and more tax payers means more revenue.

Or, we could just stick to the “blame the rich” class warfare and see how that turns out…

Posted by IrateNate | Report as abusive

I hope devaluation/inflation do not affect private
investment anuniants. Already we’re losing 20% of the
value of our retirement dollar.

Posted by RetiredRRB | Report as abusive