Why the Payroll Tax Cut's Liberal Apologists Are Wrong--and FDR is Right
December 13, 2010 - 1:53pm ET
The one-year payroll tax cut proposal in President Obama’s tax deal with Republicans has Social Security advocates worried that the reduced tax rate will become permanent, doubling Social Security’s financial deficit and jeopardizing the economic protections it provides to American workers and their families.
Some on the left agree that the payroll tax cut is likely to be extended, but see nothing wrong with decoupling Social Security from payroll taxes, and making it at least partly dependent on revenue from the general fund. They argue that paying Social Security benefits out of the general fund would replace the payroll tax with a far more progressive source of revenue. By allowing Social Security to be funded out of the income tax, the argument goes, it reduces the overall burden on the middle class. In addition, they contend, Social Security would never again face a financial shortfall like the current one, because it would be free to borrow as needed.
This argument has merit, but are the potential benefits of making Social Security a standard budget item worth risking the whole program? Social Security is an independent program that has survived largely unchanged for 75 years, but making it depend on general fund revenue puts it at the whims of Washington politicians.
Social Security’s independence from the general fund has been a fundamental feature of the program since its inception. Franklin Delano Roosevelt famously said that payroll taxes “give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.” It is a statement that has rung surprisingly true. Social Security’s sense of ownership grants the program universal approval across the political spectrum; even Tea Party Activists wave signs stating, “Keep your government hands off my Social Security.” The political winds have changed time and again, but Social Security has never wavered in popularity. There is perhaps no other government program of which that can be said.
More importantly, Social Security’s independent, dedicated revenue stream in payroll taxes protects it from the cuts that perennially threaten other government programs. But co-mingling Social Security with other government programs would subject it to the yearly spending decisions of Washington insiders, placing it squarely in the cross-hairs of partisan maneuvers and ideological attacks. If Social Security were to depend on funds from the general budget, it would have to compete with other programs for increasingly scarce federal dollars. Under yearly pressure for funding, Social Security would quickly become a shadow of its former self.
Even given its current structure, the ballooning budget deficit has made massive cuts to the program viable once again. The Deficit Commission’s recommendations would cut benefits deeply. But under pressure from advocacy groups to admit that Social Security is separate from the general budget, the Commission justified its proposal on the basis that it would shore up Social Security’s finances, not reduce the deficit. One can only imagine that if Social Security were part of the general budget and actually contributed to the budget deficit, the case for cuts would be that much stronger.
Liberals who think the payroll tax is regressive must ask themselves, Why was Franklin Delano Roosevelt, perhaps the most progressive president in our nation’s history, responsible for its enactment? Roosevelt knew that the universal and flat nature of the payroll tax would be an essential component of Social Security’s popularity. It assures middle class Americans that they are paying into a program for their future benefits. Social Security is not about Washington insiders distributing benefits. In fact, payroll taxes were designed to be more like insurance premiums. Everyone pays the same share of their income into the program, up to $106,800, and everyone is insured when they retire, die, or become disabled. When the flat payroll tax rate is taken together with the progressive benefit formula, however, it becomes clear that Social Security is actually one of our most redistributive government programs. The lower your lifetime wages, the higher the proportion of your earnings will be replaced by Social Security. So while the link between wages and benefits insures the program’s overall fairness, the proportional returns of the program are greatest for those who need them most.
The timing of the payroll tax cut could not have been any worse. Confidence in Social Security’s financial integrity is at a record low. Scores of conservatives were swept into Congress by claiming that President Obama and the Democratic Congress had raided the Social Security Trust Fund. If Congress decides to lower payroll taxes and replace it with funds from the general budget, it will give credence to the myth that Social Security is “broke.” And once given the excuse, Social Security’s opponents will defund the program to prop up their pet projects.
Social Security is a promise. It’s a promise made explicitly on every pay stub. And it is the American public's ownership of the program that has kept the promise alive for 75 years, allowing Social Security to lift 20 million people, including 1 million children, out of poverty this year alone.
But if Social Security's dedicated tax is substituted with revenue from the general fund, it will confirm many Americans' fears that the government has been "raiding" Social Security, severely undermining their ownership of the program. Rather than remain a promise kept, Social Security will be a promise forgotten.
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Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future