AARP to Congress: End the Social Security tax holiday

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(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?

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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