The Payroll Tax Holiday “Endangers Social Security’s Financial Integrity” | Social Security: Real Trust Funds? | Principles to Guide Reform
Social Security has provided vital assistance over the years to millions of American seniors, disabled persons, and children of workers who have passed away. In 2011, almost 1,105,000 Arizonans received Social Security benefits, including over 754,000 retired workers.
I have fought over the years to uphold Social Security’s promise and reject measures that erode seniors’ benefits. For example, I cosponsored measures that would allow seniors who choose to keep working after retirement to do so without being penalized by the so-called Social Security earnings limitation. Legislation to repeal the limit for seniors over age 65 is now law. I voted for amendments to repeal the tax on Social Security benefits that was first implemented under President Bill Clinton, but those amendments never became law.
President Obama fought for and won an extension of the Social Security tax holiday through the end of 2012. While that means that working Americans can count on an extra $20 a week for the rest of the year, it will also erode the financial underpinnings of Social Security, which relies on those payroll taxes to pay benefits.
Arguing against the President’s plan, even the National Committee to Preserve Social Security and Medicare warned: “Extending and expanding the payroll tax cut further endangers Social Security’s financial integrity.”
There are better ways, in my view, to provide tax relief to help spur economic recovery than to deprive Social Security of the revenue it needs. I voted against the President’s plan when it came before the Senate in February.
Last year, as the national debt approached its statutory limit, President Obama threatened to stop sending seniors their Social Security checks. According to the President, “there may simply not be the money in the coffers to do it.”
What was the President talking about? After all, his budget director had just written a column for USA Today a few months before, claiming the Social Security trust funds “will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.” In their 2012 Annual Report, the Social Security trustees claimed that the trust funds held assets of almost $2.7 trillion at the end of the prior year.
How can the Social Security trust funds be flush with $2.7 trillion in assets, yet lack “the money in the coffers” to pay benefits, as the President suggested?
The fact is, the trust funds are really just an accounting mechanism for tracking all income to and disbursements from the funds, and are not filled with $2.7 trillion in cash that is set aside for the benefit of workers.
When the Social Security trust funds run a surplus – that is, when they collect more in payroll taxes than they pay out in benefits in any given year – the excess revenue is left invested in special interest-bearing government securities. Once invested in these IOUs, the surplus becomes indistinguishable from other revenues in the general fund of the Treasury and may be used for any other federal government purpose.
What is important to remember, though, is that when Social Security alternatively runs a cash-flow deficit (in other words, spending is greater than the revenues coming in), the special securities are redeemed with general fund revenues to make up the shortfall and ensure that Social Security benefits continue to be paid in full. Cash-flow deficits began in 2010 and are expected to continue as far as the eye can see. Even before the Social Security tax holiday, Social Security spending in 2012 was expected to exceed revenues by $60 billion, and the holiday will increase the revenue shortfall in payroll taxes by $112 billion.
By the end of the decade, not even interest earned on the IOUs will cover the revenue shortfall. The downward spiral toward insolvency will accelerate until today’s surplus of almost $2.7 trillion is completely eaten away in 2033. Once all of the IOUs have been redeemed, the system will be able to pay out only about 75 percent of benefits.
That does not mean, however, that we have 21 years to avert the coming crisis. While the securities held by the Social Security system theoretically provide it with the resources to pay benefits for years to come, the reality is more complex than that, as President Obama’s threat to withhold Social Security benefits reveals.
As an increasing share of general revenues are used to redeem the federal government securities held by the Social Security trust funds, the government will have to reduce other spending, increase taxes (or other income), or borrow from the public (and thus add even more to the already exploding national debt). This is neither good for seniors who rely on Social Security, nor other taxpayers who rely on the general fund to pay for other government programs. And it means, rather than rest easy in the knowledge that their benefits are paid from a solvent and stable Social Security system, seniors will be forced to compete for limited federal dollars from general revenues. In other words, funding for Social Security benefits will become subject to the vagaries of the annual budget process, and the link between Social Security contributions and benefits will be broken.
That should not be allowed to happen.
Whatever Congress does to reform the system, it must abide by some fundamental principles. First and foremost, the core benefits of those who are currently retired or nearing retirement should not be cut.
I also believe initiatives to preserve and protect Social Security must:
- Reduce pressure on future taxpayers and on other budgetary priorities;
- Provide benefit levels that adequately reflect individual contributions to the system; and
- Preserve and strengthen the safety net for vulnerable populations, including people with disabilities and survivors.
These are the principles I’ve voted to uphold.
