Social Security Trustee: Obama's Tax Plan Could 'End Social Security as We Know It'

December 13, 2011 - 9:58 AM

(CNSNews.com) – A Social Security trustee says that extending the cut in the Social Security tax, as President Obama is demanding, could make the entitlement program more dependent on income tax revenue in the future, leaving it with less political protection than it enjoys  now.

Social Security was established as a worker benefit program, to be funded by what employees paid into the system through payroll tax deductions. Replacing much of that financing with income tax revenue would fundamentally change Social Security, making it more like other government entitlement programs that are subject to political whims and budget priorities, Charles P. Blahous III, a member of the board of trustees for Social Security and Medicare, told CNSNews.com.

“It’s really basically a conversion of the system from payroll-tax financing to partial income-tax financing,” Blahous said of the plan that Obama is pushing.

Extending the payroll tax cut would not reduce Social Security benefits -- at least in the short term, Blahous said. But, he added “down the line you probably have a greater risk of benefit cuts because of the fact that benefits have less protection when they are subsidized by the general fund.”

President Barack Obama and Democrats in Congress want to extend the payroll tax holiday -- a temporary two percent cut in the payroll tax enacted last December -- for another year. House Republicans have proposed an alternative plan to extend the cut.

But doing so would reduce funding for Social Security by $119 billion over the next year – on top of the $105 billion in reduced funding this year. Democrats propose to offset the 2012 funding shortfall by raising taxes, while Republicans propose to offset it by cutting spending.

Either way, the offsets to maintain Social Security funding would be drawn from the general fund, which derives mainly from income tax revenue.

In a recent commentary, Blahous explained why continuing the payroll tax cut “could eventually end Social Security as we know it.”

When President Franklin D. Roosevelt put Social Security into place, he designed it to be funded separately from the general fund. He was quoted as saying, “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

“The FDR conception, the idea that this is a separate system funded by a separate tax, does enjoy a certain amount of political protection because of that conception,” Blahous told CNSNews.com.

“FDR understood that. Generations of subsequent defenders of Social Security have understood that,” he continued. “If you just had a program that was in the general financing pool, if you didn’t have a separate trust fund, if you didn’t have a separate payroll tax, Social Security would have a lot fewer political protections. It would basically be competing each year” with every other priority.

The board issued a report in August saying that Social Security ran a deficit in 2010 for the first time since 1983. The deficit for 2010 was $49 billion, and the deficit for 2011 is projected to be $46 billion, the report said.

Currently, the $2.68 trillion Social Security trust fund draws only 5 percent comes from the general fund. If Obama’s payroll tax proposal is adopted, that would increase to 14 percent, according to Blahous’s estimates.

“You very quickly reach a point where general revenue becomes a very substantial part of the trust fund, and in fact, within just a few years, you reach a point where the combination of general revenue transfers and interest credits, which some people regard as general revenue transfers, from one government account to another, take up the entirety of the trust fund,” Blahous said.

Blahous is one of two public trustees on the six-member board Social Security Board of Trustees. The other public member is Robert D. Reischauer. The remaining trustees are Treasury Secretary Timothy Geithner, Labor Secretary Hilda Solis, Health and Human Services Secretary Kathleen Sebelius and Social Security Commissioner Michael J. Astrue.