Payroll tax holiday: Will it drain the Social Security Trust Fund?

Payroll tax deduction would divert crucial funding from Social Security, some worry.  But the payroll tax legislation was specifically crafted to protect the fund.

By , Guest blogger

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    This chart shows the amount of money transferred into Social Security trust fund from January to September of 2011. The payroll tax legislation is specifically designed not to affect social security, Bernstein argues.
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When the payroll tax holiday was first legislated back in 2010, there was considerable, and understandable, anxiety about the impact of reducing payroll taxes on the Social Security Trust Fund.  After all, if 2% of the tax was going to stay in workers’ paychecks, wouldn’t that disrupt the flow to the fund?

Yes, but the legislation was crafted to explicitly protect the trust fund, by transferring resources from the government’s general coffers.  Even the Social Security actuary—now that’s gotta be a fun guy at a party—whose job is to protect the fund, publicly recognized the replacement agreement (see box here).

Yet once again, we’re hearing the same arguments from opponents of the extension.  These arguments were wrong then and they’re still wrong.  In fact, given that the program has been in place for about a year, we can now see the evidence of the payments from the general fund to the trust fund.

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The bars in the chart above, drawn from the bowels of Treasury documents that account for monthly flows in and out of the Social Security trust funds (there’s one for the retirement program and one for the disability program), show the amount of the transfers through September.

There it is: evidence that the trust fund has been held harmless.  This is not complicated stuff.  If the tax cut is extended, the new legislation will carry the very same obligation.

The US economy is still fragile in lots of ways, but it’s also shown the slightest bit of momentum in recent weeks.  Failing to extend the tax cut right now is thus bad macro and bad micro.

At the macro level, it would be a great way to lose what momentum we’ve got, pulling over $100 billion out of the economy when we should be putting more in.  At the micro level, why policy makers would want to reduce workers’ paychecks at a time like this, when so many working families are struggling to make ends meet, is beyond me.

The record shows the trust fund will be replenished.  If policy makers still insist on taking away this much needed wage boost right now, they’re going to have to find another reason.

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