As a former colleague of mine has astutely observed, sometimes the most consequential policy mistakes occur because everyone is looking the other way. The President’s latest “jobs” proposal to extend, and expand, cuts in the Social Security payroll tax is a good example. While nearly everyone has focused on the debatable efficacy of temporary payroll tax relief as a stimulus measure, few seem to have noticed the severe problems it could create for Social Security itself.
Specifically, the proposal would accelerate a process begun last December: transforming Social Security from what it long has been—a benefit earned by worker contributions—into an income tax based system more akin to welfare.
As a Social Security Trustee, I believe it is critical both lawmakers and the public have a greater understanding of this effect before the policy is advanced further.
The payroll tax is Social Security’s lifeblood. If it continues to be significantly cut, then only one of two things can happen:
Social Security’s insolvency is accelerated, or;
Social Security must be financed by general (read: income tax) revenues.