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Social Security advocates say tax cuts will hurt program

By STEPHEN OHLEMACHER
December 12, 2010

President Barack Obama speaks at a White House news conference in Washington. The president's plan to cut payroll taxes for a year would provide big savings for many workers, but has Social Security advocates nervous it could jeopardize the massive retirement program's finances. (AP Photo/J. Scott Applewhite)

President Barack Obama’s plan to cut payroll taxes for a year would provide big savings for many workers, but makes Social Security advocates nervous that it could jeopardize the retirement program’s finances.

The plan is part of a package of tax cuts and extended unemployment benefits that Obama negotiated with Senate Republican leaders. It would cut workers’ share of Social Security taxes by nearly one-third for 2011. Workers making $50,000 in wages would get a $1,000 tax cut; those making $100,000 would get a $2,000 tax cut.

The government would borrow about $112 billion to make Social Security whole. Advocates and some lawmakers worry that relying on borrowed money to fund Social Security could eventually force it to compete with other federal programs for scarce dollars, leading to cuts.

Social Security taxes “ought to be held sacrosanct,” said Rep. Earl Pomeroy, D-N.D., chairman of the House Ways and Means subcommittee on Social Security.

“When you start to signal that the (Social Security) tax levels are negotiable, you end up in long-term trouble, I think, in terms of making absolutely certain that the entitlement funding streams are secure,” Pomeroy said.

Social Security is funded by a 6.2 percent payroll tax on the first $106,800 earned by a worker. The tax is matched by employers. The package negotiated by Obama would reduce the tax paid by workers to 4.2 percent for 2011. Employer rates would stay unchanged.

Obama administration officials say that a payroll tax cut is an efficient way to stimulate the economy by immediately increasing take home pay for about 155 million workers. The nonpartisan Congressional Budget Office agrees, and many business groups and Republicans support it.

“What came out of the compromise was the idea of the payroll tax holiday, which, frankly, a huge number of economists and other experts had been talking about over the last two years with a lot of support in both political parties,” said Larry Summers, Obama’s chief economic adviser.

The United Auto Workers endorsed the deal, saying, “Working families will likely spend this money in their local communities, creating jobs and stimulating overall growth.”

The payroll tax cut is part of a larger package negotiated by Obama and GOP lawmakers to extend a sweeping array of Bush era tax cuts that expire at the end of the month. Some Democratic lawmakers have balked at the plan, saying it is tilted too much in favor of the rich.

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.

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.”

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Online:

Social Security Administration: http://www.ssa.gov/

National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org/

Copyright © 2010 The Associated Press

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4 Responses to Social Security advocates say tax cuts will hurt program

  1. bmclellan

    December 12, 2010 at 11:56 am

    This scheme, as stated in the article, will not help but will hurt low income people, so it is evident that the focus of this whole debacle / boondoggle is to rip the guts out of SS and relegate the blue collar elderly American to the dumpster.

    Somehow these so called leaders have got to find a way to get their filthy hands on this, the only savings account / safety net that poor Americans possess. Their view is that it is a giveaway program when in fact people contribute their whole working lives without receiving interest on their contribution while the government plays Keno with the funds.

    Most Americans will die before ever recouping a fraction of what they have paid in. The poisoning of our waters, atmosphere, and the absence of affordable health care stand in stark contrast to assertions that our longevity continues to increase.

    The haves mantra is, if it works for the little guy, even as paltry as the good it manages , then by all means tear it down, usurp the power, and assert their dominance. Those who have nothing will never miss it. Hack..

  2. Carl Nemo

    December 12, 2010 at 1:00 pm

    This whole ‘tax cut’ scam is atypical of the actions of our now failing, short-lived attempt at empire.

    The Roman games whether in the “Great Coliseum” of the “Circus Maximus” were sponsored by Rome’s wealthy patrons. So as they debased the people’s currency; ie., the denarius etc., the games became evermore important to distract them from the crimes of their leaders and the desperate straights in which Rome found itself.. They had loaves of bread and sealed jugs of wine catapulted into the crowds at halftime to placate them. So with little employment due to the burgeoning slave population our our problems with illegal alien workers, it gave the people a ‘fun’ afternoon in the sun watching men and beasts hack and devour each other to pieces. Lotsa fun huh?! We now have UFC cage fighting, NASCAR races, Dancing with the Stars and a host of other mind-numbing programs all broadcast into everyone’s homes via HDTV in our times. So too ‘dear leader’ is fiddling about while our modern Rome burns.

    My point, is that Obama & Co. along with our Congressional crimpol contingent are well aware as to how to appease the masses regardless of the fact that it fails to address the core issue that we are dead broke as a nation. They’ve been pilfering the SS Trust Fund since the Johnson era. In fact it was crafty LBJ and his advisers that came up with the idea to pilfer the totally solvent fund to pay for their Nam debacle. Once started, they just couldn’t kick the habit. Only the gods know how much the SS Fund has been ripped off over the years. In fact this year the fund had to cash in $28 billion dollars of their Treasury IOU’s in the form of government securities, too bad in the worst of times for our now failing government soon to face up to national insolvency concerning all programs. The beat goes on…! : |

    Carl Nemo **==

  3. Carl Nemo

    December 12, 2010 at 1:05 pm

    Re: Second paragraph

    “slave population, our our problems with illegal alien workers,” Should read: slave population, as our problems with illegal alien workers, …My apologies.

    Carl Nemo **==

  4. Jake

    December 19, 2010 at 6:09 am

    A few observations: When we paid into social security, we paid with dollars that were taxed before they were deducted. Now, many of us pay taxes on 85% of the benefits received (a “temporary” tax that has become permanent). Isn’t this double taxation? (A tax on the return of principal we’ve paid that has already been taxed.)

    As I understand it, social security is an “insurance” program, not an “entitlement” program or “welfare” for the elderly. We paid our premiums over 40 – 50 years, now we’re entitled to our annuity payments based on what we paid in as calculated by our yearly social security statements and the final reconciliation made by the social security administration when we applied for our “benefits”. If we had the same agreement with a “private” insurance company we would receive our annuity for whatever term we agreed to: 5 years, 10 years, life, life of oneself and spouse, etc. based on the premiums paid. If the company reneged it would be in breech of contract and in violation of law and could be sued. So, why’s the government intruding into this arrangement? Would it (could it) with a private insurer?

    If you are self-employed or have medical insurance premiums deducted from your salary, you either receive a credit for the premiums paid when you file your income tax forms or the premiums are deducted with “pretax” dollars, amounting to a credit. Once you’re retired, you can only take a deduction (exceeding 7% – soon to go up – of adjusted gross income) for these premiums. Example: Medicare premiums of $100 per month deducted from your social security check. Cost: $1,200 per year. AGI: $20,000 @ 7% = $1,400. No deduction allowed. No credit offered. How is this fair to senior retirees?

    If a corporate raider bought an insurance company, looted its capital set aside to pay claims, replaced that capital with IOU’s it doesn’t intend to pay, then abandoned the shell leaving its policy holders with no or reduced benefits, that raider is going to court, made to pay restitution, and maybe going to jail for a long time. How is this situation different from the government “raiders” who’ve looted your social security trust fund, replaced its capital with IOU’s now considered part of the national debt that it can’t repay fully, and then unilaterally decides it will reduce its promised payout and extend the number of years before you can receive any payment at all? Who’s going to jail for this?

    Perhaps we should insist that the social security administration, if it’s going to renege on its contract with us, return what we paid in, adjusted for inflation, and with reasonable compounded interest, and we’ll take that lump sum, invest it ourselves, live on the proceeds and whatever principal we need, leave what’s left to our heirs, and the hell with them.

    You may want to contact your congressperson with your feelings including the insights above if you agree. http://www.congress.org