Recently, I was on a television panel with a Democratic senator who seemed to suggest that the proposed extension of the payroll tax cut will not impact the Social Security Trust Fund because, according to a letter from the Social Security system’s chief actuary, funds will be transferred from general revenues. I thought to myself, “I wonder what Charles Blahous would say.” And now I know for sure. My colleagues at Economics 21 have just published an excellent short essay by Blahous on the payroll tax cut and the Social Security Trust Fund:
The ongoing effort to partially convert Social Security from payroll-tax-financing to income-tax-financing – by further cutting the payroll tax as a stimulus measure and replacing the funds with general revenues – may in short order put an end to the longstanding conception of Social Security as a benefit earned by worker contributions. The demise of this conception would also threaten the special political protections Social Security benefits have long enjoyed.
Most Americans do not know all of the details of Social Security finances. They do, however, retain a strong sense that Social Security participants somehow paid for their benefits, and that the program’s Trust Funds represent “their money” in a way that the financing for other government programs does not. This sense gives Social Security benefits an extra political protection relative to other programs. It would likely end if we abolished the Social Security payroll tax, did away with its trust fund, and funded the program with general budget revenues.
The proposed payroll tax cut extension would take a major step toward ending this longstanding special status. There’s no way to know where exactly the tipping point is, but it will come sooner than most observers now realize. Continuing and expanding this policy would likely soon turn bipartisan perceptions of Social Security into something more like welfare or at least like Medicare Part B: that is, benefits continually open for political renegotiation because they’re known to be subsidized from the general fund — that beneficiaries themselves did not really pay for them.
I strongly recommend the piece, which clarifies a number of the issues at stake in the ongoing congressional debate.