Protecting the Trust Fund: A Key Component of the Payroll Tax Cut

December 7th, 2011 at 10:21 pm

When the payroll tax holiday was first legislated back in 2010, there was considerable, and understandable, anxiety about the impact of reducing payroll taxes on the Social Security Trust Fund.  After all, if 2% of the tax was going to stay in workers’ paychecks, wouldn’t that disrupt the flow to the fund?

Yes, but the legislation was crafted to explicitly protect the trust fund, by transferring resources from the government’s general coffers.  Even the Social Security actuary—now that’s gotta be a fun guy at a party—whose job is to protect the fund, publicly recognized the replacement agreement (see box here).

Yet once again, we’re hearing the same arguments from opponents of the extension.  These arguments were wrong then and they’re still wrong.  In fact, given that the program has been in place for about a year, we can now see the evidence of the payments from the general fund to the trust fund.

The bars in this chart, drawn from the bowels of Treasury documents that account for monthly flows in and out of the Social Security trust funds (there’s one for the retirement program and one for the disability program), show the amount of the transfers through September.

There it is: evidence that the trust fund has been held harmless.  This is not complicated stuff.  If the tax cut is extended, the new legislation will carry the very same obligation.


Sources: See page 5, both here (OASI) and here (DI).

The US economy is still fragile in lots of ways, but it’s also shown the slightest bit of momentum in recent weeks.  Failing to extend the tax cut right now is thus bad macro and bad micro.

At the macro level, it would be a great way to lose what momentum we’ve got, pulling over $100 billion out of the economy when we should be putting more in.  At the micro level, why policy makers would want to reduce workers’ paychecks at a time like this, when so many working families are struggling to make ends meet, is beyond me.

The record shows the trust fund will be replenished.  If policy makers still insist on taking away this much needed wage boost right now, they’re going to have to find another reason.


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4 comments in reply to "Protecting the Trust Fund: A Key Component of the Payroll Tax Cut"

  1. pjr says:

    Defenders of social security object to making the system dependent on transfers from the general fund, thereby turning the system into a type of welfare program. They are correct that this bad idea is based on a left-wing concept of the system and must cease. I am hopeful that it will end as the left-wing trades its tax cut in exchange for the right-wing’s Bush tax cut on income over $250,000 (which is just beyond the maximum taxable earnings for social security, for a two-earner couple). Sounds fair. And Obama gets what he’s wanted, chess-style. But I’m not confident that the GOP will agree and not have the votes to block such a deal.

  2. Tom says:

    If they don’t like that, they could restore the Making Work Pay tax credit, wasn’t the Payroll Tax Holiday a substitute for MWP? Does anyone here have a wayback machine, who exactly didn’t want to extend MWP?

  3. Jim Z. says:

    Jared, I think you misunderstand the context of those who, then and now, are very concerned about this FICA tax holiday. The GOP is salivating over their new talking point that SS is after all entangled in the General Fund. Most Americans are already confused about the relationship between the Trust Fund and the GF, believing that SS contributes to the nation’s deficits. Now they’ll have a new piece of pseudo evidence to that effect. This is war (against SS), and we are losing, cut by cut.

  4. urban legend says:

    What pjr and Jim Z said. Jared doesn’t seem to get it. Social Security needs political ammunition against the relentless and permanent assault from the right wing. The legal separation of the Trust Fund from the general fund — Social Security revenues and Trust Fund holdings and earnings not usable for anything except Social Security benefits, no use of general funds for Social Security — has been an important point for that support. It’s the basis for being able to say that Social Security has nothing to do with the deficit. Now the defense must be qualified by, “Well, except that right now. . . .” It is not going to be politically easy to restore the proper funding (“tax increases”) without some substitute cuts that Republicans will not allow. Besides, it is not a particularly progressive form of tax cut.

    In any case, the defenders (who prefer the euphemism “payroll tax holiday”) have not addressed the concerns of those opposed to or concerned about this form of tax cut. That the general fund is making up the difference is the problem, not an answer.