President Trump’s tax reform agenda is in trouble. That’s not news, but one proposal that his team has floated as a way, ostensibly, to cut taxes on the middle class is. According to the Associated Press, they’re toying with the idea of eliminating the payroll tax, which funds Social Security and part of Medicare, or cutting it drastically.
This is an absolutely terrible idea, partially because it smells like a back-door way of cutting Social Security benefits. It needs to be nipped in the bud.
“This proposal is a Trojan horse,” the veteran Social Security advocate Nancy J. Altman told me. “It appears to be a gift in the form of middle-class tax relief, but would, if enacted, lead to the destruction of working Americans' fundamental economic security.”
To understand why, one needs to examine the history and mechanics of Social Security, something the Trump team hasn’t tried or doesn’t care to do. But we can.
The “contributory” nature of Social Security, through which beneficiaries pay for their eventual benefits via the payroll tax, dates back to its very origins in 1935.
The most commonly quoted defense of the payroll tax comes from Franklin Roosevelt, who called the feature “straight politics” and explained: “We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. … With those taxes in there, no damn politician can ever scrap my social security program.” But FDR didn’t say that until 1941, six years after enactment, when he was interviewed for a government study.
The real rationale for the payroll tax was more nuanced. FDR’s Committee on Economic Security, which drafted the program in 1934, had engaged in a spirited debate over whether to fund Social Security via general government revenues or from worker contributions.
There were several reasons to choose the latter. One was to make clear that Social Security wouldn’t be a welfare program, but a retirement insurance benefit provided by right. Inevitably, the committee reported, a “gratuitous” pension — one funded by the general budget, “must be conditioned upon a ‘means’ test,” which meant it would be delivered only to the poorest Americans and fulfill only the slighted needs.
“The gratuitous pension, in fairness to the legitimate demands of other needy groups, must hold all grantees down to a minimum standard,” the committee advised Congress. A contributory system that amounted to an annuity, “can be ample for a comfortable existence, bearing some relation to customary wage standards.” That’s essentially the Social Security retirement system we have today.
Social Security’s creators thought that the contribution system would not only ensure that benefits would be reasonably large, but that they wouldn’t get too large. The idea was that the strain on workers’ take-home pay resulting from too much expansion in the program would stay Congress’ hand. As it happened, Social Security proved to be so popular that the public remained on board through several expansions, including coverage of spouses and dependents, and the addition of disability insurance in 1956.
As FDR foresaw, endowing Social Security with its own revenue stream has protected it over the years from grasping politicians — mostly conservatives, who have aimed since 1935 to eviscerate the program. The weekly or bi-weekly payroll deductions that go to the program have given workers a proprietary interest in benefits that has been hard to undermine.
That’s why President Obama’s 2010 deal with Congress to cut the employee share of the payroll tax temporarily — to 4.2% of wage income from 6.2% — also was a terrible idea. (Employers pay another 6.2%, but their share wasn’t affected by the 2010 deal.)
The tax cut was a device to put a few more bucks into families’ pockets during the depths of the Great Recession. But although it was understood that the lost revenues would be made up dollar for dollar from the federal budget, the arrangement risked permanently undermining the system’s finances. Making it worse, the cut failed to steer the additional funds to the families who needed it the most. Every worker got the same tax break — billionaires got the same maximum $2,136 cut as anyone else earning the maximum $106,800 in wages subject to the payroll tax at the time.
Under the targeted Making Work Pay program that was replaced by the payroll tax cut after Republicans refused to continue the program, low-income families were entitled to up to $800 — any family earning $40,000 or less would have received more from Making Work Pay than the tax cut, while everyone else, including CEOs and members of Congress, did better under the new arrangement.
The full payroll tax eventually was restored after two years, but the erosion of the link between wages and Social Security has lived on; to this day, some people still think Social Security is financed by the federal budget, even though that’s not the case.
The Trump proposal potentially raises the manipulation of the payroll tax to a new level. The details reported by the Associated Press are sketchy and preliminary. But thus far, there’s no indication that Trump views this change as a temporary measure. If it’s designed as a permanent conversion of Social Security’s revenue stream from the payroll tax to general revenues, that’s a wide-open door to budget-cutting at the expense of retirees and workers.
Already, conservatives and budget hawks repeat as a mantra that the cost of Social Security is “unsustainable.” That’s their claim even though the program runs a surplus today and ensuring its fiscal stability for the future would require a modest increase in the tax rate or removal of the cap on taxable wages ($127,200 this year).
Scrapping the payroll tax would make it easier for Congress to cut Social Security benefits under the guise of saving the government money. And that’s just another way to funnel more money to the rich, at the expense of the working class. And who needs that, other than people who already have enough?
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