Payroll Tax Cuts Ignore Long-Term Financing Disaster

Posted: Dec 02, 2011 12:01 AM

WASHINGTON -- Congress is working on extending the employee Social Security payroll tax cut for one more year, and possibly cut it for employers, too. But no one's talking about how much revenue this will drain from a fund that's already turned "cash negative."

This is the largely unspoken fiscal conundrum behind the payroll tax debate that's taking place this week on Capitol Hill, and we're talking real money here, folks.

Social Security's solvency issues do not get the news attention they deserve. But last year -- before the revenue-losing tax cuts were enacted -- the program was paying more money for benefits than it had coming in.

That's the first time this had happened since the early 1980s, when the nation fell into a deep recession and the nation's unemployment rate shot up to nearly 11 percent, sharply reducing Social Security's income.

Covering the loss of payroll revenue from this year's 2 percent tax cut means that the Treasury had to come up with an additional $105 billion. If the tax cut is extended for another year, as appears likely, the feds will need to pay an additional $267 billion to fully cover benefit payments in 2012.

Is the payroll tax cut, passed last year in a compromise budget deal to boost declining incomes, endangering the future of Social Security?

There were strong arguments why payroll tax cuts were needed to put additional money in worker paychecks to spend at a time when so many cash-strapped Americans were struggling to make ends meet.

It would increase consumer spending and demand for goods and services, and to some modest degree, it has done that.

At the same time, it further threatens the future solvency of Social Security on which 55 million American depend, and this isn't counting the tsunami that is coming soon when millions of baby boomers will be showing up at Social Security offices to sign up for promised benefits.

This is a long-term financing disaster that's waiting to happen. By 2035, Social Security will be supporting 91 million retires with significantly fewer workers contributing to its revenue fund. Right now, there are three workers paying into that fund for each retiree. That ratio drops to two by 2035 if not before.

Democrats have been criminally irresponsible about this looming insolvency, insisting everything's fine and talk of bankruptcy is nonsense.

Earlier this year, Senate Democratic Leader Harry Reid told a Capitol Hill rally that Social Security should be left alone and didn't need to be fixed. "Let's worry about Social Security when it's a problem. Today, it is not a problem," he said.

Despite sweeping Social Security reforms proposed by the co-chairmen of President Obama's debt reduction commission, Reid told MSNBC that "Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have."

Tell that to Social Security's trustees.

"The irony in all of this is that if we dither long enough, ultimately we will indeed face the threat of benefit cuts being 'slashed' by a full 22 percent, according to last year's Social Security Trustees' report," Charles Blahous, one of the trustees, wrote in the Wall Street Journal last February.

"It's not a reformed Social Security system that threatens to cut benefits, but the status quo -- and our elected leaders would do well to acknowledge this reality," Blahous said.

In the meantime, Republicans are resisting Obama's plan to extend the payroll tax cut to employers, saying that would blow a huge deficit hole in Social Security's financing and the budget, too. That's why they are offering budget cuts to offset the one-year extension cost: extending the federal worker pay freeze for three more years; cut the workforce by 10 percent; and make higher-income people pay more for Medicare.

That would save $250 billion over 10 years, enough to pay for a 2012 payroll tax cut, according to the Congressional Budget Office.

But let's face facts, this is only a temporary tax cut that -- absent needed structural reform of Social Security -- will eventually have to end.

What is needed in this economy are permanent, across-the-board income tax cuts that businesses and workers can plan on year in and year out -- that will improve the bottom line for employees and employers alike.

But Obama is unalterably opposed to permanent tax rate cuts, as we have seen in the temporary, impotent tax credits contained in his bogus economic stimulus bills that have failed to lift our economy out of its recession.

So, while there are good arguments to help struggling working families by leaving a little more money in their paychecks, this is not the long-term answer to what ails this economy.

This doesn't mean that the payroll taxes should not be permanently cut in the future, but that's going to require major reforms in Social Security's structure, shrinking the size and cost of government, and overhauling the tax code to unleash needed capital investment for economic growth and job creation.

In other words, all the things that Obama and the Harry Reid Democrats now oppose.