Obama's "Tax Holiday": A Poison Pill for Social Security

You know what they always say: Pay now or pay later. Middle-class Americans may pay very dearly for the president's tax deal, and at the stage of life when they can least afford it.
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You know what they always say: Pay now or pay later. Middle-class Americans may pay very dearly for the president's tax deal, and at the stage of life when they can least afford it. By providing a temporary cut in the payroll taxes that fund Social Security, this deal starts the nation down a slippery slope that could lead to permanent benefits cuts for the middle class and even more wealth for the rich.

In other words, Obama's "payroll tax holiday" could send the financial safety of America's seniors on a permanent vacation.

The embattled president lashed out at his critics at today's press conference. (Well, not all his critics. Just the ones in his own party. That seems to be the pattern lately.) He sneered at those who, he said, just want to "be able to feel good about ourselves and sanctimonious about how pure our intentions are."

"Purity" is a strange word for opinions that are strongly held by seven out of ten Americans, including most Republicans, independents, and even Tea Partiers. They're against cutting Social Security, and would rather raise taxes on the wealthy instead. This deal moves in the opposite direction by keeping taxes down for the rich and strengthening the hand of those who want to cut Social Security. The president's track record on this issue isn't reassuring, either. While he's attacked GOP privatization schemes, he has also carefully phrased his "defenses" of Social Security with qualifiers like the one about "protecting Social Security as a reliable income source" (a statement which avoids addressing benefit levels.)

It was Barack Obama who promoted an off-balance set of priorities that made deficits the center of attention, at a time when the official unemployment rate is 9.8% (and the unofficial rate is much higher). It was Barack Obama who formed a deficit commission and then gave it explicit authority to address Social Security (which doesn't affect the deficit). And it was Barack Obama who appointed two longtime Social Security slashers to co-chair it (along with an economist who has made cutting benefits her life's mission).

The president may resent the widespread lack of trust from members of his own party. But their distrust doesn't mean they're "sanctimonious" or "purist." It means that he's done very little to earn anyone's trust on this issue. Instead, he's given people every reason to doubt his willingness to protect Social Security.

Obama described his disaffected base as impractical people who only want "the satisfaction of having a purist position and no victories for the American people." But that assumes that this deal is a "victory for the American people." Yes, he won an extension of unemployment benefits. But when good liberal economists on the presidential payroll struggle to describe it as "a plan that's all about jobs," the gentlest thing one can say is that they're overstating the case. When it comes to jobs then, as Dean Baker succinctly says, the plan is "not trivial, but it's an order of magnitude less than what we should be looking for."

Worse, whatever gains working Americans might see under this plan is likely to cost them far more in the long run. It's not just that the $120 billion cost of the "payroll tax holiday" could be used more effectively in other ways. And it's not just that it could be distributed in a way that doesn't give yet another break to the wealthy. (Obama's economists keep repeating that this plan will save $1,000 next year for a family making $50,000, and that's true. But it will save more than twice as much ($2,136) for a family making $106,800, the current maximum for the FICA tax. And it will save $2,136 for a family making a million dollars. And $2,136 for a family making ten million. And $2,136 for a family making a hundred million...)

Those are serious flaws. But the biggest problem with the "payroll tax holiday" is the way it undermines Social Security.

The long game

It's no accident that the "payroll tax holiday" was first proposed by sworn enemies of retirement benefits on the deficit commission. We should be asking ourselves: When tax breaks can be designed in so many different ways, why did they choose this way? Why single out the only source of Social Security's funding? Could it be part of a long-term game plan?

Let's play out a likely scenario if this deal is enacted:

The 2% tax holiday expires in 2012, an election year. Meanwhile the government debt will have increased by $120 billion, the amount that will be paid into Social Security to cover the cost of this "holiday." Bear in mind: Never before in Social Security's 75-year history has it taken any funds from the overall Treasury. It's forbidden by law from adding to the deficit. That's why it has its own trust fund, which currently holds a surplus of $2.6 trillion. That's money the Federal government has borrowed, and which it's morally (and legally) obligated to pay back so we can receive our retirement benefits.

Flash-forward to 2012: The "holiday" is set to end. Republicans aren't likely to acknowledge that this was a temporary program, any more than they did with the Bush cuts. Any attempt to let the 2% cut expire will be spun as an "Obama tax hike" on the middle class. In order to believe this "holiday" is really temporary, you have to believe that Obama and other Democrats will be willing to take that kind of heat, under enormous pressure in an election year. Any takers?

Extending this 2% cut would gut Social Security's finances forever. But whatever happens, look at what Social Security's enemies will have accomplished:

  • The "lockbox" principle between Social Security and the overall budget will have been erased forever. A relatively small infusion of cash into the trust fund will be the poison pill that erases the "trust fund" principle. Once the program has contributed to the deficit, it's no longer separately funded.
  • The enemies of Social Security will have painted a bull's eye on its only source of funding. People will see it as a "new tax" -- in a year when the economy's not expected to have fully recovered.
  • They'll be in a position to argue, once again, that "America can't afford" to provide financial security for middle-class seniors.

What's more, would-be cutters like Maya McGuineas and Alan Simpson have made it clear that they'd love to get their hands on the $2.6 trillion in Social Security's Trust Fund to use it for other purposes (like covering the debt that was run up by tax cuts for the wealthy and a couple of wars). This will give them their chance.

How do you think all of this is going to play out? My guess is that the 2% cut will be extended for even the richest Americans. After all, 94% of the working public would see their payroll tax go from 4.2% back up to 6.2%. Can't you see the campaign ads now? "Democrats want to increase your payroll taxes by fifty percent!"

The pressure to cut Social Security benefits will be greater than ever. That will also give the slashers their chance to welsh on the promissory notes to the trust fund. They might even be able to do away with Social Security's separate accounts altogether. In the meantime, this deal will have ended the program's 75-year history as a program that working Americans, along with their employers, fund for their own future use.

That's why Social Security isn't just another government program, and it's why lower- and middle-income people support it so strongly : You pay into Social Security while you work, and then you collect from it when you retire. Its benefits aren't just another item on the Federal balance sheet, and payroll taxes aren't just another tax. By design, Social Security is a secure way for people to provide for their own future. This deal could end that forever.

Either the anti-Social Security conservatives have played a better game of chess than the President, or this is the outcome he wants. But it doesn't matter in the end whether he's been outplayed, or is playing one of those "three dimensional chess games"... in this case, with seniors as pawns. It's a lousy move either way.

Compromises should move us forward, not backward

As Nancy Altman pointed out, a permanent 2% cut would double the projected 75-year shortfall in Social Security, while lifting the payroll tax cap would eliminate that shortfall. The first option would benefit rich people and the second would help the middle class. Which option will be chosen in 2012 if this deal takes effect? Ladies and gentlemen, the betting windows are now open...

The president said this in today's press conference: "In order to get stuff done, we're going to compromise. This is why FDR, when he started Social Security, it only affected widows and orphans. You did not qualify. And yet now it is something that really helps a lot of people."

He's right. But when it comes to Social Security, this deal isn't the kind of incremental progress he's celebrating. It only makes it easier for Social Security's opponents to move us backwards, not forwards. And that historical reference makes his earlier defense of the program even less reassuring: "Let us ensure," said Obama's statement, "(that) we continue to preserve this program's original purpose in the 21st century." Meaning what? Only protecting widows and orphans?

FDR also said, "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program." Obama's deal would change that principle forever.

There are those who will argue this forecast is too pessimistic. But why take the chance when other stimulus packages would be more effective? There are also those who are unhappy when the President isn't trusted on an issue. But why hasn't he done more to earn trust on Social Security, especially before proposing a change of this magnitude? The bottom line remains the same: There's no reason for voters to swallow a bitter pill that could kill Social Security... and leave them facing an old age filled with uncertainty and fear.

UPDATE: Steve Benen at Washington Monthly is among those pointing out that yesterday's deal won't touch the Social Security Trust Fund ("yet," I would add), which we also point out above. He adds: "For those of us looking out for Social Security, that's good news." That's like having your king in check in a chess game and saying "it's not checkmate, and that's good news."

To be fair, Steve also says " I don't doubt that it remains a GOP goal that Democrats are going to have to fight." But a relaxed attitude toward this "holiday" deal - "when listing legitimate concerns about the tax policy agreement, this one doesn't make the cut" - puts Social Security at risk. If this deal's accepted, it's bad news.

Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Strengthen Social Security campaign. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."

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