AARP to Congress: End the Social Security tax holiday

CBS/iStockphoto

(MoneyWatch) COMMMENTARY AARP recently released a statement declaring that Congress shouldn't extend the Social Security payroll tax holiday beyond the current year. Earlier this year, Congress extended through the end of the year the two-percent payroll tax reduction that went into effect in 2010. Congress originally described this tax reduction as a temporary measure to boost the economy.

This reduction saved working families about $1,000 per year in taxes; it was assumed that workers would spend this windfall, which would help boost the economy. But instead, many workers have used the windfall to reduce their debt and strengthen their personal balance sheets, a logical move from anyone's perspective.

AARP's position makes sense when you understand how this temporary tax reduction works and how Social Security is financed. The payroll tax holiday isn't supposed to impair Social Security's finances, so transfers are made from general revenues to the Social Security trust fund to make up the shortfall caused by the temporary tax reduction. By the end of 2012, these transfers will total more than $200 billion.

Since we're running a large deficit, this means we're borrowing even more money -- issuing more Treasury debt -- to fund this temporary tax reduction. The reality is that all citizens will end up paying more in the future for today's temporary tax holiday.

The Social Security trust fund holds special Treasury debt, so you could argue that the Social Security trust fund is helping fund the temporary tax holiday. But this isn't a case of "borrowing from Peter to pay Paul" - this is a case of Paul borrowing from Paul to pay Paul!

Here's a tax policy koan: If you end a temporary tax reduction, is that a tax increase? I'm sure some people are just champing at the bit, waiting to blast lawmakers who support ending the Social Security payroll tax reduction. Give me a break!

Social Security's finances are already challenged, as we saw from the 2012 Annual Report of the Board of Trustees of Social Security. We're fooling ourselves if we think these temporary payroll tax reductions aren't eroding Social Security's financial security.

Is Social Security broke or not?
How the debt super committee can fix Social Security
Does Social Security contribute to the deficit?

The Deficit Commission, a.k.a. the Simpson-Bowles committee, gave us a pretty good blueprint for long-term fixes in Social Security's financing. Let's stop fooling around with Social Security's financing and put it on a sound footing for decades to come. What are we waiting for?

[Carly_EngageAmerica]

Extending the payroll tax cut is not a real solution nor does it help sustain Social Security. There are a number of other options for making Social Security a sustainable program and for reducing the deficit. Progressive price indexing would substantially reduce the long-run funding gap to $3.2 trillion from the current law funding gap of $16.1 trillion. Thus, it would only require a modest solvency tax increase equal to 0.6% of taxable payroll. In terms of long-run spending, it would result in the second smallest program, about 82 percent of the size of the current program. Also, changing the benefit formula for SS would essentially eliminate the long-run funding gap and require no additional solvency tax. It also would produce the most dramatic reduction in spending on benefits, equal to 23% of long-run spending under the current benefit formula. In addition, it would retain the progressive nature of the benefit formula, but reduces the degree of progressivity relative to the current formula. Furthermore, raising the retirement age would reduce Social Security's unfunded obligations for retiree benefits to $6.3 trillion and require a solvency tax of 1.3% of taxable payroll. It would result in the third-largest program, with about 87% of the current law spending. Moreover, though the distribution of net taxes would still be progressive, of the four potential changes considered it would reduce the degree of progressivity the most relative to current law. Finally, eliminating the taxable maximum would reduce Social Security's unfunded obligation for retiree benefits to $8.3 trillion and require a 1.3% payroll tax increase. It would result in the largest program in terms of long-run spending, and would increase the progressivity of the program (http://eng.am/sWDUJ8).

[jeannutson]

Since this tax holiday is adding up to the national deficit,it has a high probability of exerting adverse impact on the economy as a whole.

[ThinkNauts]

How about we end the government's Roman Holiday instead?

[purplestates]

Saving social security is important; however, let be fair. Government has being borrow money to pay for the Bush tax cut and 2 wars. The GOP & Bush made Bill Clinton's surplus disappear. Where is the AARP's statement on this ?