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Medicare and Social Security advocates nervous about tax cut deal

Medicare and Social Security advocates worry that entitlements face restructuring under the new deal brokered between President Obama and the GOP.

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The payroll tax cut would provide relief to any worker earning a wage. It would replace Obama's Making Work Pay tax credit, which has provided modest increases in most workers' paychecks for the past two years.

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The payroll tax credit would be more generous to individuals making more than $20,000 and married couples making more than $40,000. For those making less, the payroll tax cut would be less than the Making Work Pay credit.

Making Work Pay, which expires at the end of the year, gives workers a tax credit of 6.2 percent of their wages, but it is capped at $400 for individuals and $800 for couples. The credit is phased out for individuals making more than $75,000 and couples making more than $150,000.

A worker would have to make $20,000 in wages for the payroll tax cut to equal the $400 Making Work Pay tax credit; couples would have to make $40,000.

At the wealthy end of the pay scale, workers making $106,800 — the maximum amount of wages subject to Social Security taxes — would see their payroll taxes reduced by $2,136. That worker's spouse could also get a payroll tax cut of up to $2,136, if he or she makes at least $106,800.

The proposal requires the Treasury Department to replenish Social Security with other government funds, which would have to be borrowed.

"The payroll tax cut has absolutely no effect on the solvency of Social Security," said White House economic adviser Jason Furman.

Social Security has accumulated a $2.5 trillion trust fund since the 1980s. But the government has borrowed that money to pay for other programs. The Treasury Department has issued special bonds to Social Security, guaranteeing the money will be repaid, with interest.

As aging baby boomers start to retire and strain the system, advocates worry about future benefit cuts. This year, for the first time since the 1980s, Social Security will pay out more in benefits than it collects in payroll taxes. Without changes, Social Security's trust funds will run out of money by 2037, according to the trustees who oversee the program.

To save money, the leaders of a bipartisan deficit commission recently proposed a gradual increase in the full retirement age, from 67 to 69, drawing opposition from groups representing older people.

"This 2 percent payroll tax cut is the beginning of the end of Social Security as we know it," said the National Committee to Preserve Social Security and Medicare, which is led by former Rep. Barbara B. Kennelly, D-Conn. "Worker contributions have successfully funded the program for 75 years and that critical linkage between contributions and benefits is what keeps Social Security a self-funded program."