Obama’s Tax Deal Could Jeopardize Social Security

Obama’s Tax Deal Could Jeopardize Social Security

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Democratic supporters of President Barack Obama’s tax bargain with Republicans—even those who are holding their noses—point to the many benefits for middle-class, low-income, and jobless Americans. One provision in particular seems to promise the happy crinkle of wrapping paper under the tree: the one-year tax “holiday” on Social Security deductions.

But, like so many gifts Americans hand out at this time of year, this is one we cannot afford. As many policy experts warn, the payroll tax holiday is more of a tax happy hour that would come at a huge cost—and undermine the very basis of Social Security.

Obama’s deal would knock 2 percentage points off the payroll contributions of the country’s 155 million workers in 2011, from 6.2 percent to 4.2 percent. Employers would continue to pay their full share of 6.2 percent of workers’ wages.

For the one-year reduction, the deal calls for the federal government to deposit the total amount of what should have been collected, about $120 billion, into the Social Security Trust Fund, so the tax holiday doesn’t add to the program’s long-term deficit.

Obama says the tax holiday will enable the average worker to hang on to $1,000 for the year.

But the plan worries leading progressive experts such as Nancy Altman, codirector of Social Security Works and author of The Battle for Social Security. Altman said the tax holiday is not only “dangerous.”

The 2 percent payroll-tax cut would give millionaires $2,236—hardly enough to make a difference in their spending. Meanwhile, the average worker earning $40,000—who really does need the money—would get only about $800, Altman said.

The typical African-American employee would see less than $700 spread over the year, while the typical Latino or Native American would have only an extra $600 or so to spend. for

Even though the government would repay Social Security the $120 billion is lost tax receipts, Altman and many other experts and members of Congress— including some Republicans— say the GOP is likely to try making the 2 percentage-point cut permanent.

Going into the 2012 presidential election, expect GOP leaders to argue that ending the tax holiday will amount to a tax increase, just as they’ve fought to make the Bush tax cuts permanent, despite the earlier deal to end it next year.

If they succeed—at a time when Republican power is again on the rise—Altman and others say Social Security will become politicized as never before. GOP leaders will fight against continuing to pay the difference back to Social Security out of general tax funds.

That, said Altman—who is regarded by some as a possible commissioner of Social Security one day—would double the program’s long-term funding shortage, an amount that is currently manageable but would be more daunting without its full funding from workers’ payroll contributions.

Were that to happen, she said, GOP leaders would realize a “self-fulfilling prophecy” and claim the program, which is now fairly easy to fix, is unsustainable.

The 2-point reduction— almost one-third of the payroll tax—would double the long-term funding shortage now projected for Social Security to cover all of its obligations to Americans to 75 years CLARIFY. In doing so, it would also fulfill the conservative prophecy that the program cannot pay for itself and should be narrowed to only help people in need.

When President Franklin Delano Roosevelt launched Social Security in 1935, he explained that as a universal entitlement, the program would have the support of Americans across the board. Support remains very high for the program, because people at every income level contribute and benefit. That has kept the political wolves at bay.

Sidebar: OBAMA'S BETTER PLAN

Given the risk of undermining the single greatest anti-poverty program accomplished by his Democratic party, a program that helped secure and build the great American middle class, what’s a poor president to do in the face of GOP poker players?

Actually, there’s a good alternative to the payroll tax cut, one that’s now in place but would have to be extended. It’s called the Making Work Pay Tax Credit. Part of the previous economic stimulus package, it was created by none other than President Obama.

Making Work Pay gives lower-income workers up to $400 a year to offset their payroll-tax contributions. That amount could be increased, and the upper limit means that wealthy people would not be able to pocket the lion’s share of savings.

Analysis by the Center for Budget and Policy Priorities shows that extending this tax credit would be better, more targeted economic stimulus than the payroll-tax holiday. That’s because almost all of the tax credit would go to people who are likely to pump the money right back into the economy through purchases of groceries, kids’ clothing, home repairs and so on.

In fact, U.S. Representatives Ted Deutch of Florida and Earl Pomeroy of North Dakota, both Democrats, are drumming up congressional support to replace the payroll-tax holiday with a middle-class tax cut, such as Making Work Pay, in any House proposal.

This past Friday, the Congressional Black Caucus issued a consensus statement opposing the extension of tax cuts for the wealthy. Saying that CBC is an “an ideologically diverse Caucus,” the statement also noted the group’s support for a “payroll-tax holiday or equivalent payment, such as a tax rebate check, with guarantees that Social Security will not be deprived of revenue.”

Progressive critics of the payroll-tax holiday also say that by boosting workers’ paychecks directly through the progressive income-tax system via Making Pay Work, the White House could avoid adding public confusion about the current structure of Social Security as a locked-in insurance program— one entirely funded by Americans through their paychecks.

Presumably, the White House hit a Republican stonewall with Making Work Pay or some other, more progressive options. But why give up without vigorous public debate that might delay a deal for a while but put the onus on conservatives while preserving the democratic basis of the Democratic Party?

The hard issue is that in making such tax deals— which echo some bad bargains that the White House made to get corporate backing for health care reform— Obama isn’t merely jeopardizing his own presidential future. He is failing to fulfill his promise of “hope”—the hope that he could move politics from the short-term bargaining of Beltway budgeters to a genuine re-examination of national priorities, such as stabilizing our income and health security for all families and communities.

Sure, everyone knows he’d lose some, but, as happened with Democratic candidates who stood their liberal ground in November’s election, he’d also win a few—and keep a lot of hopeful and energized voters in his corner.

--Paul Kleyman