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The Jobs Bill: Pretending to Fund Social Security

Charles Blahous | 09/19/2011
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The President’s latest “jobs” proposal would extend and deepen cuts in the Social Security payroll tax. While as a conservative I generally prefer to see lower taxes, as a Social Security trustee I am deeply concerned that the troubling implications of this proposal have been scarcely discussed. Instead the public debate has focused mostly on the efficacy (or lack thereof) of such temporary tax relief as a stimulus measure.

Before this legislation is seriously considered, there needs to be greater understanding that it would take a major step toward transforming Social Security from what it has long been -- an earned benefit, funded by separate worker payroll taxes -- into an income-tax based system more akin to welfare.

A former colleague of mine has astutely observed that sometimes the most consequential policy decisions happen simply because too few realize that they are being made. In 1983, for example, Social Security faced an immediate financing crisis, which legislation was said to resolve for decades to come. What the public wasn’t told, and which too few policy makers recognized at the time, was that the solution would produce enormous annual Social Security imbalances going forward – big surpluses in the near term, followed by even larger deficits in the long term. And so for decades after the 1983 reforms, mounting Social Security surpluses allowed elected officials to mask deficits elsewhere in the federal budget, without meaningfully amassing resources to pay for the looming costs of the Baby Boomers’ Social Security benefits. So here we sit in 2011, with Social Security still technically “solvent” but running an annual $150 billion deficit of tax income relative to costs, and holding $2.6 trillion of debt in its trust funds that the general government is hardly in position to redeem.

We are now in danger of enacting another transformative change to Social Security, and a potentially disastrous one. Cutting the payroll tax isn’t just a stimulus measure; it’s a decision to fundamentally alter how Social Security is financed.

The payroll tax is Social Security’s lifeblood. If it continues to be significantly cut, then only one of two things can happen:

 

  1. Social Security’s insolvency is accelerated, or;
  2. Social Security must be financed by general (read: income tax) revenues.

 

Either choice undercuts Social Security’s future ability to operate as it has in the past.

So far, the Administration has quietly made choice #2: to convert Social Security into a general revenue-financed program.

The payroll tax cut enacted last December was accompanied by a provision to funnel roughly $105 billion in general revenues into the Social Security Trust Funds. This year’s “American Jobs Act” aims to cut payroll taxes by a further $240 billion in next year alone. The bill text recently submitted to Congress contains language funneling an offsetting $240 billion in general revenues into the program to make up for the uncollected taxes. That sums to a full $345 billion of general revenue (income tax) commitments just over 2011-12, to support Social Security benefit payments.

This is not a small change to Social Security; it is transformative. Consider this: in 2005, President George W. Bush proposed that workers be permitted to invest part of their Social Security contributions in personal accounts. The Congressional Budget Office then projected that this would result in roughly $323 billion in payroll tax revenues being redirected from the Trust Funds to personal accounts over the following ten years. Though all of that money would have been saved to finance future Social Security benefits, policy opponents voiced strong concerns about the supposedly-ruinous “transition cost” of personal accounts.

Just two years of payroll tax cuts now embraced by the Obama Administration, however, would shift more payroll tax revenue away from Social Security than CBO found President Bush’s proposal would over ten. Even more importantly, unlike President Bush’s proposal, none of this payroll tax cut would be saved to finance future Social Security benefit payments. The revenue would be “replaced” by new debt issued from the general government accounts – to be paid for decades from now with our children’s income taxes.

This transformation of Social Security financing warrants opposition both from self-identified progressives and conservatives. The reason that progressives should oppose it is straightforward: because cutting the payroll tax straightforwardly undermines our ability to finance benefits. This is why 61 House Democrats wrote the President on July 21 to express firm opposition to a further payroll tax cut extension.

Cutting the payroll tax is clearly also an attack on the progressive vision for Social Security’s future. Many progressives argue that the solution to Social Security’s shortfall is to raise taxes by increasing the wage base subject to the payroll tax. But the case that Social Security might be rescued with significant future tax increases is fatally undermined if elected officials conclude that the current payroll tax is already too high to sustain during a recession. Passage of the AJA would take the progressive solution to Social Security’s shortfall completely off the table.

Conservatives should also oppose the proposal with equal vigor, though for different and more complex reasons. For conservatives the problem lies primarily not with cutting payroll taxes but with issuing general revenue transfers to the Social Security trust funds. These transfers create legally binding debt that future taxpayers must redeem. Simply put: they convert Social Security into a program that requires higher income taxes to fund.

A temptation on the conservative side is to simply say, “The Trust Fund doesn’t mean anything anyway, economically. Why should I care if additional debt is issued to it?” This instinct is both naïve and substantively wrong. Though debt held by the trust funds may not have the same economic significance as debt borrowed in the public markets, it has the clear political meaning of authorizing additional spending, and the legal meaning of explicitly obligating the federal government to produce the required funds.

If you doubt this, consider that even in 2011 Social Security will spend $150 billion more than it collects in tax revenue. And yet there is no discussion of whether that $150 billion gap should be closed even in part with spending reductions. Why? It is entirely because the debt held by the Trust Funds gives the program permission to spend money, no questions asked. If the Social Security Trust Funds were now depleted, there would be a negotiation now ongoing over how to correct the balance of spending and taxes. Every time more debt is issued to the Trust Funds, that matter is decided wholly in favor of higher spending.

Conservatives should vigorously oppose this policy because it essentially requires that income taxes (rather than payroll taxes) must be raised in the future, to redeem Social Security Trust Fund debt and to pay benefits. This would convert Social Security into something more like welfare, for which the funding is provided – not by contributions from all covered workers – but preferentially from those subject to the income tax.

In sum, choking off Social Security’s tax revenue and issuing debt in its place is a terribly short-sighted policy, both for Social Security and for the general budget. Social Security faces challenges enough without being the source of funds for yet another round of fiscal stimulus. Leave it alone, or beneficiaries, taxpayers and the program itself will face dire consequences.

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.


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