Fixing the Fiscal Cliff Will Hasten Entitlement Crisis

Posted: Nov 21, 2012 7:24 PM
The coming fiscal cliff's mix of tax hikes and spending cuts are projected to seriously hamper economic growth over the next two years, and Congressional leaders would be wise to negotiate fixes for the problems. One of the more popular potential fixes, however, is only going to hasten the coming entitlement crisis by worsening the finances of Social Security.

A one-year extension of the employee-side payroll tax cut was passed in December of 2011. It's scheduled to lapse along with the other fiscal cliff policies in 2012. This is a particularly popular tax cut because it goes by and large to lower- and middle-income Americans. Payroll taxes, however, are the way that Social Security gets finances. Foregoing that revenue will only make it worse.

Social Security's finances are permanently in the red. It was in 2010 that benefits paid exceeded revenue collected for the program - and the program is never projected to recover. Cutting payroll taxes further will only worsen the coming Social Security crisis.


As the CBO's trust fund analysis shows, Social Security deficits in 2013 and 2014 are projected to be $58 billion. An extension of the payroll tax cut will cost $205 billion, borne entirely by new Social Security deficits.

This is not to say that the payroll tax cut is not a good idea. The Congressional Budget Office projects that cutting payroll taxes over the next two years will create between 300,000 and 1.3 million jobs. This could be quite an economic boom at the expense of the solvency of the Social Security program.

Additional cuts to the payroll tax also run the risk of becoming a semi-permanent drain on Social Security's revenue stream. In the wake of last year's payroll tax cut, Treasury Secretary Tim Geithner said "I don't see any reason to consider supporting its extension" into 2013. What looked like a distant possibility now looks like an inevitability.