How Payroll Tax Cut Affects Social Security's Future

Dec 7, 2011

President Obama put Congress on notice Tuesday in a speech in Osawatomie, Kan.

He said that unless a temporary payroll tax cut is extended this month, 160 million Americans would see their taxes go up next year by an average of $1,000. But there's concern on both sides of the political aisle that the payroll tax holiday might be undermining the solvency of Social Security.

Fact No. 1: Last year, for the first time in its 75-year history, Social Security took in less money than it paid out. Fact No. 2: This year, the first of the baby boomers reached retirement age and began collecting Social Security benefits. Fact No. 3: The payroll tax holiday that Congress approved a year ago reduced Social Security's revenues this year by $145 billion.

Obama showed no sign of being troubled by those facts when he popped into the White House briefing room earlier this week and called on Congress to extend the payroll tax cut for another year.

"It will help families pay their bills, it will spur spending, it will spur hiring and it's the right thing to do," Obama said.

Republicans on Capitol Hill might disagree. Although they do not think other tax cuts should be paid for, they make an exception when it comes to Social Security.

"Getting rid of the way we fund Social Security through the payroll tax is a dangerous idea," says Lamar Alexander, the Senate's No. 3 Republican. "Taking money from Social Security funding is a long-term raid on solvency of Social Security."

It's not just Republicans raising red flags about Social Security, either. Bernie Sanders, the Vermont Independent who caucuses with Senate Democrats, says he agrees with Obama that middle class families and the working poor need tax relief to weather tough economic times.

"My concern is diverting hundreds of billions of dollars from the Social Security trust fund into that immediate tax relief," Sanders says. "So I would love to see tax relief, but done in a different way."

Charles Blahous, whom Obama appointed last year to be one of the six trustees of Social Security and Medicare, thinks it's a far greater danger than most people anticipate. He too says the payroll tax break might be harming Social Security's long-term solvency.

"I mean, I'm a Republican and I'm a conservative, and if you were to ask me at a first approximation, do I want lower taxes or higher taxes, then obviously I want lower taxes," Blahous says. "The problem here is that I'm also a public Social Security trustee and so I'm honor-bound to identify when this causes a change or a difficulty for the Social Security program, which it does."

That's because Social Security has long been considered self-financing and thus politically immune from budget cuts. But that could change, Blahous says, now that employees are no longer paying their full share into Social Security due to the payroll tax holiday.

"This could be the beginning of the end of the idea that this is an earned benefit [and] where benefits enjoy a certain amount of political protection because of a notion that they have been paid for in the past by the beneficiaries," he says.

There's anxiety among Democrats as well about the prospect of prolonging the payroll tax cut. Nancy Altman, co-director of Social Security Works, a Washington-based advocacy group, says she's been alarmed to see a Democratic administration dipping into Social Security's revenue stream to stimulate the economy.

"Democrats were the ones that created Social Security and the ones that were the strongest champions over its 76 years," Altman says. "So to have a Democratic president proposing to undo the dedicated revenue ... it's a fundamental change that supporters of the program, I think, should oppose."

Altman worries the payroll tax cut has become so popular it will be hard to end it, and that's one reason why she opposed it in the first place.

"Many of us at the time said that it's no way this is just going to last one year. And sure enough, we're back now talking about expanding it," she says.

Some lawmakers do say the tax break is worrisome, including Rhode Island Democratic Sen. Sheldon Whitehouse.

"I think one more year should be about the limit," Whitehouse says, "because of the nature of Social Security."

A program that, until now, has always paid its way.

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