Advancing a Free Society

Don’t Allow Another Payroll Tax Accounting Gimmick

Wednesday, July 27, 2011

During his Monday evening address to the nation on the budget negotiations, President Obama repeated his call for an extension of the current one-year Social Security payroll tax cut. Whether or not this extension is agreed to as part of a larger budget deal, it is vital that Congress not permit a repeat of a costly accounting gimmick implemented when the temporary tax cut was enacted last year. The gimmick results in real additional costs and additional debt, and undermines the accounting integrity of the Social Security Trust Funds.

Background: Social Security is represented to the public as a self-financing program, designed to pay its own way. The idea is that workers fund their Social Security benefits via a separate payroll tax. The program has its own dedicated Trust Funds and can only make benefit payments from those Trust Funds. Surplus Social Security taxes in any year that they appear (3% of which come from taxation of benefits) are credited to the Trust Funds, which accumulate with interest.

Whether the amounts in Social Security’s Trust Funds represent real saving is a constantly-debated issue, and beyond the scope of this article. The main point for our purposes is that the basic ethic of Social Security financing is straightforward. On the one hand the program is not supposed to spend more on benefits than it generates in revenues. On the other, beneficiaries are to be assured that the assets in Social Security’s Trust Funds are fully available to be spent only on their benefits (and on small administrative expenses). Without that essential link between incoming taxes and outgoing benefits, Social Security would be just like any other federal program: funded from the general budget with no reason for a separate Trust Fund account.

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