FDR to Congress: don’t mess with the payroll tax

Dec. 3, 2011 (updated Dec. 6) — In 1941, six years after the passage of the Social Security Act, President Franklin Roosevelt was asked about the logic of funding Social Security with a dedicated payroll tax.

“We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits,” he reportedly responded. “With those taxes in there, no damn politician can ever scrap my social security program.”

In the current fight on Capitol Hill over whether to extend and expand last year’s payroll tax cut, some advocates for Social Security are recalling Roosevelt’s message.

“The genius of Social Security is that it’s separated from other funds,” said Nancy Altman, the co-director of Social Security Works, an advocacy organization, and the author of The Battle for Social Security. “When this comes up again next year, Republicans could be saying, ‘Let’s make the tax cut permanent and reduce benefits to pay for it.’”

Senate Democrats introduced a bill last week to extend and expand last year’s payroll tax cut and to pay for it with a 3.25 percent surtax on incomes over $1 million. Republicans quickly countered with their own, smaller bill, to be paid for primarily with a 10 percent cut in the federal workforce. The Senate rejected both proposals last Thursday.

Senate Democrats proposed a new, less-expensive bill on Monday, and Republicans are expected to introduce their own second version today. Most observers expect some form of an extension to be enacted before the current tax cut expires on Dec. 31.

It is widely agreed that an extension would provide some needed stimulus to the ailing economy, although a Citizens for Tax Justice report points out that the Democrats’ payroll tax proposal is “less targeted to working class people (and therefore less effective as economic stimulus) than the Making Work Pay Credit that expired at the end of 2010.”

It is also expected that the loss of revenue to the Social Security trust fund from lowered payroll taxes will be compensated for by money from the general fund, as it was this year. But Social Security advocates and some Members of Congress have raised concerns that by utilizing the payroll tax as the means by which to stimulate the economy, lawmakers may be providing opponents of Social Security with a long-awaited opening to undermine the program. Once a tax cut is passed, they note, it becomes very difficult to allow it to lapse.

On the Senate floor on Thursday, Sen. Joe Manchin (D-W.Va.), expressed concerns about the prospect of the tax cut becoming permanent. “[I]f we extend the cuts this year — what about the next year and the year after that?” he said. “When does it stop? When do we have the political will to finally say that we better start paying again for Social Security?”
 

“Social Security was thought of as untouchable”

Despite warnings from some Republicans, Social Security is not in any danger of going broke. In fact, it has a current account surplus of $2.6 trillion. The Social Security Board of Trustees has estimated that, as it currently stands, the program will be able to pay out full benefits for the next 25 years. After that point, the fund is projected to have enough money in it to pay a substantial portion, though not all, of the benefits it owes. To fully fund current benefit levels over the long-term, some changes would need to be made to increase revenues, such as lifting the cap on the wages on which payroll taxes are paid. If that cap — currently set at about $106,000 — were removed, analysts agree that the long-term shortfall would become a surplus.

None of the proposals currently being debated on Capitol Hill would have a direct impact on the program’s funding. The danger, according to advocates, is that by eroding the inviolability of the payroll tax revenues that had traditionally only been used to fund Social Security, lawmakers will set the stage for larger changes that could undermine the program.

According to Max Richtman, the president of the National Committee to Preserve Social Security and Medicare, Republicans have long made it clear that they would like to see benefit levels reduced, and would jump at any opening to change the program. Republican Presidential candidate Rick Perry, the Governor of Texas, has repeatedly called for ending the program, calling it a “Ponzi scheme.” House Budget Chairman Paul Ryan (R-Wisc.) released a plan last year that would raise the retirment age over time and effectively reduce benefits for all earners by thousands of dollars a year. “Republicans have had designs on it for years,” Richtman said.

Indeed, in this year’s fight over the payroll tax cut, some Republicans have said that they would not support it because it falls short of a complete restructuring of the program. Rep. James Lankford, (R-Okla.), told The New York Times, “If this is going to be the long-term rate, let’s set it and resolve long-term issues of Social Security.”

“For a long time, Social Security was thought of as untouchable,” Richtman said. “It would be political suicide to change it. Now, it’s very common to talk about raising the retirement age or cutting benefits.”

Altman agreed and added that by taking away part of the revenues that were dedicated to the program, it becomes more vulnerable in the future. “We’ve already changed the formula,” she said. “That makes it much easier to change again.”