By Mary Johnson
The Social Security Trust Fund that covers disability benefits is now about five years from running out of money. The Trust Fund that covers retirement also is in deficit and paying out more in benefits than it receives in revenues. Given the funding problems, one would think that our President and lawmakers would be buckled down to the task of shoring up program financing to ensure that the benefits of more than 54 million people will be paid. Instead, as part of his jobs package, President Obama recently proposed to cut payroll taxes in half —the same payroll taxes that are needed to pay your benefits.
In December of last year, Congress passed a temporary 2% payroll tax cut for workers. Social Security benefits are funded by a 6.2% payroll tax on the first $106,800 earned by workers, and employers match that amount. The 2011 payroll tax cut lowered the portion of Social Security payroll taxes paid by employees from 6.2% to 4.2% of earnings. Employer rates in 2011 stayed unchanged. Taxpayers who earn $50,000 a year receive higher paychecks of about $19 a week.
In a statement released last December, the White House said that the 2% employee payroll tax cut “will have a major impact on jobs and growth — creating substantial numbers of jobs.” But that hasn’t been the case. The unemployment rate hasn’t budged since the payroll tax cut started, and is still hovering around 9.1%. The tax cut drained about $112 billion in payroll taxes out of the system in 2011.
The President’s proposed expansion would reduce payroll taxes paid by both employees and employers to 3.1% each, just half the current rate. That tax cut is estimated to siphon another $240 billion from Social Security in 2012.
With both the disability and retirement Trust Fund in deficit the government will have to borrow the $240 billion to cover current benefits. During the recent debt limit battle, the payment of all Social Security benefits was cast into doubt as we approached the August 2011 debt limit ceiling. Although the Social Security Trust Fund, on paper, contains about $2.6 trillion in nonmarketable bonds, or I.O.U.s., once the federal budget hits the debt limit, the Treasury can no longer borrow to redeem those bonds to cover benefits. Thus, as long as both the federal budget remains in deficit, and Social Security revenues remain below the cost of benefits, Social Security payments remain uncertain, especially if the federal budget hits the debt limit again.
President Obama left the responsibility for coming up with a way to pay for the tax cut to the Joint Select Committee on Deficit Reduction. That could mean COLA cuts and higher Medicare costs in exchange. For this reason, TSCL is opposed to extending and expanding the payroll tax cut.
What you can do: Tell us what you think. Should the payroll tax cut be expanded to 3.1% each for both workers and employers and allowed to add $240 billion to the deficit? To send me an email, click here. Send comments by mail to: The Senior Citizens League, 1001 North Fairfax St. #101, Alexandria, Virginia 22314.
Sources: 2011 Social Security Trustees Report, May 12, 2011.