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Obama tax plan – a threat to Social Security?

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One element of the tax deal reached by President Obama and Republican leaders – a one-year reduction of the payroll tax by 2 percent – has Social Security advocates raising dire warnings.

The Strengthen Social Security coalition cites [2] the “high likelihood” that the cuts will be extended when the first year is up – which will occur at the beginning of a hard-fought election year.  The $120 billion appropriation from the federal budget to reimburse the Social Security trust fund will be increasingly vulnerable “in a political environment dominated by debates on federal deficits.”

That could “result in a huge revenue drain to Social Security,” opening the door to “deep cuts in benefits for the middle class and eroding its support for the program,” according to an analysis by the coalition.

“We’re very concerned, and we’re keeping an eye on it,” said Emily Stuart of Illinois Alliance of Retired Americans [3].  ARA is a member of Strengthen Social Security.

Nancy Altman of Social Security Works [4] says “the innocent-sounding payroll tax holiday…will lead inexorably to killing Social Security.”

She says it’s “unfathomable” that a more conservative Congress will fail to extend the cut when it expires.

Ryan Grim at Huffington Post [5] found evidence for this among several Republican senators.  “Once something like this goes into place, a year from now, when it expires, it’ll be portrayed as a tax increase,” Senator Bob Corker (R-Tenn.) told him.

“There’s always a tendency to continue those things,” said Senator George Voinovich (R-Ohio).  “Once something comes in, it’s very difficult to change it.”

A permanent 2 percent cut in payroll tax would add significantly to the program’s long-term shortfalls, and “the pressure to cut Social Security in a slow, gradual way for younger workers will be enormous,” Altman writes, with changes in benefits forumlas that “would gradually and inexorably eviscerate the benefits of the middle class.”

The payroll tax cut replaces President Obama’s Make Work Pay tax credit, which offset employee payroll taxes for the first $8,100 of income.  Curiously, the payroll tax cut was proposed by Republicans in January 2009, and the Center for Budget and Policy Priorities [6] compared it to Make Work Pay at the time.

CBPP found that Obama’s program had much greater stimulative effect because it got more money in the hands of low- and moderate-income taxpayers, who are more likely to spend it.  With the payroll tax cut, higher earners get much more than others.

Indeed, the New York Times [7] notes that shifting from Make Work Pay to the payroll tax cut means taxes will actually go up for individuals making less than $20,000 and couples making less than $40,000.

The Times estimates that at least a quarter of tax savings in the Obama-Republican package will go to the top 1 percent of the population.

Meanwhile, Republicans blocked renewal [8] of $250 annual supplemental payments to seniors who face a second year without cost-of-lliving increases in Social Security checks.

The payments are needed because Social Security cost-of-living calculations don’t take sharply rising health care costs sufficiently into account, Stuart said.