Congress Daily reports that "Democrats on Wednesday sought to shoot down concerns about the impact on Social Security of a payroll-tax extension. They released a letter from Social Security’s chief actuary stating that the cost of a one-year payroll-tax cut would not affect the Social Security trust fund. The Senate is set to vote by Friday on a new Democratic proposal to cut the employee payroll-tax rate."
The short answer here is that solvency has a very limited meaning, and that’s the problem. Congress could eliminate the payroll tax altogether, stick a provision in the legislation saying the money will be made up with unspecified general revenues, and it is possible to get a letter from the actuary saying there was no adverse effect on solvency. Congress could double Social Security benefits, insert a similar general revenue transfer provision, and get the same thing.
From a narrow actuarial perspective, the actuary doesn’t care where the money comes from – all the actuary does is certify that the money has been committed to Social Security. It’s one of the longstanding problems that e21 contributor Chuck Blahous and others have raised with regards to treating solvency as the only measure of Social Security's condition. The bottom-line: the term has a very limited meaning in this context, and is subject to manipulation.
On a related note, Ralph Bristol published a must-read piece on the potential downsides to a payroll tax cut extension…and how it could lead to radical changes with Social Security. (h/t RealClearMarkets)
Here are some of the key excerpts from Mr. Bristol’s piece, which is aptly titled – Payroll Tax Holiday is Trojan Horse:
There are many opinions, and even extensively detailed and debated proposals, on how to solve the impending solvency problem with Social Security. Traditional fixes have always included raising payroll taxes or reducing benefits, or both. A less traditional, conservative reform idea is to transform Social Security into a defined contribution plan like an Individual Retirement Accounts (IRA) that workers would own.
An idea that is never promoted in the open (at least not yet) because it would be so unpopular, is to leave payroll taxes and benefits the same and simply fund the unfunded benefits by increasing other taxes – that is, to destroy the carefully designed and protected balance between taxes paid during one’s working lifetime and benefits received during retirement. That balance has been protected for more than 70 years for both political reasons and to respect the traditional American value that proud, able-bodied Americans do not want to be known as welfare recipients.
Never has this reform idea been debated in any congressional committee or the floor of either chamber of Congress, and yet we have planted the foundation for a reform plan even more liberal than that, and are about to let the cement harden for another year.
If Democrats, with Republican help, can extend the payroll tax holiday long enough and make the cuts deep enough, they will have established a substantial precedent, both in terms of size and duration, for solving Social Security’s solvency problem by funding any unfunded liabilities with taxes that are at least as progressive as the federal income tax…
It’s highly unlikely anyone in the mainstream media will recognize it, or report it if they do, so most people will have no idea that voting to “raise taxes” this time is any different than any other time…
But the payroll tax should never have been cut except as part of a more thoughtful Social Security reform plan that had been fully debated, keeping in mind the traditional relationship between payroll taxes and benefits, and the reason for that relationship, which should not be changed without full and open deliberation by Congress. It is better to correct a mistake before the mistake takes on a life of its own and becomes the default reform plan that you would never have knowingly approved.
It’s worth reading the entire piece, but Mr. Bristol concludes with a bang: “Unless Republicans in Congress see what’s happening and stop it, ten years from now, when President Obama is musing about his legacy, it won’t be Obamacare that he’s most proud of. It will be his success at tricking Republicans in Congress into helping him adopt more progressive Social Security reform than any liberal politician had even dared bring up for debate.” Punchy stuff, surely. But Mr. Bristol’s policy arguments are worth considering.