I was originally willing to support the package that President Obama negotiated with the Republicans. While I am not happy about giving tax breaks to rich people, President Obama extracted more concessions from the Republicans than I had expected in the form of extending unemployment insurance benefits, an expanded earned income tax credit, and most importantly a substantial reduction in the payroll tax.
However, after further thought and conversations with people around Washington (first and foremost, Nancy Altman, the co-director of Social Security Works), I have become convinced that this deal would be a disaster. Paul Krugman does a nice job laying out the limited benefits of the stimulus, but my greater concern is what happens to Social Security in this story. Effectively, this deal would give us a permanent two-percentage point reduction in the payroll tax in a Washington climate very hostile to Social Security.
The logic is that the tax cut is scheduled to expire in December of next year. While it would require new legislation to extend the cuts, the Republicans will describe the failure to extend the cuts as a tax increase on middle class workers. (Several Republicans have already told reporters that this would be their view.) . . .
Democratic officeholders have had difficulty standing behind tax increases for the very richest people in the country. It is difficult to imagine them sticking their necks out for tax increases that will hit low and middle-income workers, especially in a context where unemployment is virtually certain to be above 8.0 percent and quite likely above 9.0 percent. This means that the reduction in Social Security taxes may not be for just one year, it may persist for the indefinite future.
In principle there is nothing wrong with financing a portion of Social Security benefits with money from general revenue. This was in fact the original intention of President Roosevelt when he designed the program. However, the fact is that the program has always been financed exclusively by the Social Security tax that is taken from workers’ wages. This makes the tax regressive, but it has the advantage that workers can quite legitimately say that they have paid for their benefits. This will be to some extent less true if a portion of the funding comes from general revenue rather than payroll taxes. In short, getting funding from general revenue opens a new line of attack on the program.
The prospect of this tax cut being the basis for a renewed attack on Social Security could be dismissed if the program had defenders in high places, but this does not appear to be the case. Most of the Republicans would almost certainly like to privatize Social Security.
Unfortunately, the Obama administration cannot be counted on to defend the program either. In fact, top officials in the administration seem to view attacks on Social Security and its supporters as a way to prove their manhood. President Obama’s decision to appoint two arch-enemies of Social Security to chair his Fiscal Responsibility commission certainly does not inspire confidence among supporters of Social Security.
In short, supporters of Social Security have good reason to oppose the tax deal. It is easy to have the same stimulus with an expanded version of President Obama’s Making Work Pay tax cut. Supporters of Social Security should reject the latest deal and tell President Obama to stand behind his own tax cut. This is what presidents are supposed to do.
