Obama Signs Payroll Tax Cut Extension Into Law

The FICA/payroll tax goes into the SocialSecurity TrustFund.  This is a dedicated fund currently worth $2.6 trillion, which has been built up over time through employee and employer contributions, along with accrued interest.  Current and future SocialSecurity beneficiaries receive benefits from this fund.  No general revenues are involved, except for administrative and clerical costs.

Under the payroll tax cut initiated in the 2010 lame duck tax deal, the revenue loss to the TrustFund from the payroll tax holiday is made up through compensatory payments into the TrustFund from general revenues. This scheme is now continuing -- deepening a relationship between SocialSecurity and general revenues (read deficit) that did not exist until the December 2010 tax deal.  This will make SocialSecurity increasingly vulnerable to demands for "reform."

In the worst case, Congress could choose to enact the payroll tax cut without actually appropriating revenue compensation for the TrustFund.  This would mean that the payroll tax cut directly depletes the TrustFund, creating financial/actuarial problems far sooner than the currently anticipated shortfall date of 2036.

But even if the TrustFund receives full revenue compensation -- for both employer and employee contributions -- SocialSecurity will be jeopardized.  That's because the resources in the TrustFund will be increasingly comingled with general revenue funds -- and, hence, increasingly connected to the deficit.

If the government can't  pay back SocialSecurity money it has borrowed to pay for other things (through IOUs, bonds, etc), it certainly won't be shy about cutting SocialSecurity to pay itself back for funds it shared with Social Security to offset revenue losses from the payroll tax holiday.

Also worth worrying about here is contagious political cowardice about "raising taxes."  The payroll tax holiday is framed as just that -- a holiday, ie, a short-lived break. But as we know from other tax cuts with built-in expiration dates, the planned end of a tax cut quickly becomes a "tax increase" in popular parlance.  There hasn't been much resolve to allow the years-long tax holiday for the rich to end.  When the time comes, will there be greater resolve to allow an end to the 2-year tax holiday for workers and 1-year tax holiday for employers?  Even when billed as a "middle class tax increase" and a "job-killing tax on business"?

Once the payroll tax basis of SocialSecurity financing has been corrupted the future of SocialSecurity will no longer be in doubt.  It won't have one.

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