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.”
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.”