Payroll tax cut raises worries about Social Security’s future funding

She added: “The biggest concern is that this was done without any hearings, without any apparent regard for the impact on Social Security.”

The chief actuary of the trust fund has affirmed that the payroll tax cut will not put a dent in the $2.6 trillion fund, which is expected to pay all promised benefits until 2036. The law requires the government to make up any shortfalls. The fund has been built up over time by contributions from the 12.4 percent payroll tax, of which employees and employers each pay 6.2 percent. The temporary break reduced workers’ share by 2 percentage points.

Personal Post

Gallery

 These tax breaks were the 10 most valuable for taxpayers in 2011.

More on this Story

• 2011 was a bust -- could 2012 be better?
• After year’s wild ride, stocks back where they started
• Verizon backs off plan to charge $2 convenience fee
• Sloan: Financial chaos, complexity in 2011

View all Items in this Story

• New fear for Social Security’s future
• Verizon to charge $2 fee for online bill payment
• Federal judge accuses SEC of misleading court
• Detroit stands out in national housing data
• As Web sites come and go, so too could the information you entrust them with
• Online retail leads holiday sales

Running in the red

Examining the origins and consequences of the nation's escalating debt

Altman said that the tax had never been reduced before, and the most it has been raised at any time is 0.5 percentage points.

“We’ve never really monkeyed around with Social Security before,” Blahous said. “Until now it was understood the payroll tax was supposed to do one thing. It wasn’t supposed to be a stimulus mechanism. Now the payroll tax is this variable thing that goes up and down according to other economic conditions. That is a real transformation of what that money is supposed to do.”

Economic pressures

The pressure to cut the tax came from the country’s slow-growing economy. Last December, Republican lawmakers fought to extend the Bush tax cuts, which were about to expire, while the White House pushed for a tax credit called Making Work Pay. Their compromise: a two-year extension of the Bush tax cuts, a year of extended unemployment benefits and a one-year payroll tax cut that effectively replaced Obama’s tax credit idea.

Last year’s payroll tax cut saved the average U.S. household more than $900, according to the Tax Policy Center.

In this month’s tax fight, Democrats borrowed from the GOP playbook, arguing that reverting to the old rate would be a tax hike. And economists worried that allowing the cut to expire would dampen economic growth in 2012 by as much as two-thirds of a percentage point.

The payroll tax cut could be here to stay for a while. Senate Majority Leader Harry M. Reid (D-Nev.) has named senators to a conference committee to search for ways to extend the two-month cut for all of 2012.

Blahous said Social Security will be facing enough financial pressures in the years to come without the payroll tax cut complicating matters.

This year, the Social Security system projects that it will pay out $46 billion more in benefits than it will collect in cash. It made up for the shortfall by redeeming Treasury bonds bought in years when there were cash surpluses.

Lawmakers on both sides of the aisle, including Sen. Bernard Sanders (I-Vt.), Sen. Jon Kyl (R-Ariz.) and dozens of House Democrats, have expressed concerns about the impact of the payroll tax cut on Social Security.

“Whether you’re on the left or the right, you should really dislike this,” Blahous said. “It has been somewhat mystifying, the determination to do this. I just think it’s shortsightedness.”