Obama tax proposal worries Social Security allies

[September 13, 2011]  WASHINGTON (AP) -- Some Social Security advocates fear that President Barack Obama's desire to cut taxes supporting the program will undermine its vaunted stature as a self-financing pension system that provides checks to retirees based on contributions they made while working.

For now, though, the administration insists -- and many experts agree -- that the proposal would have no impact on the program's financial soundness or ability to pay benefits averaging $1,077 a month to 55 million recipients..

Cutting Social Security taxes is the keystone of Obama's $447 billion plan to create jobs and leave more cash in people's pockets, an effort by the president to bolster the ailing economy and his own 2012 re-election prospects.

The payroll tax cut -- an enlargement of one already in effect this year -- would take a $240 billion bite out of Social Security revenues in 2012. Obama would replenish the lost FICA (Federal Insurance Contribution Act) taxes with money from the overall federal budget -- keeping Social Security whole but forcing the government to borrow more and further swelling the federal debt..

The problem with Obama's proposal, critics say, is that propping up Social Security with general funds from the Treasury erodes its revered status as a self-funded insurance program in which payroll taxes collected from workers pay benefits for retirees, the disabled and their survivors. The proposal would put Social Security into competition for scarce federal dollars with other programs, leaving it more exposed to budget-cutters.

"As long as we could say it's self-funded, we have the high ground" in defending the program from efforts to trim benefits, said Max Richtman, president of the nonprofit National Committee to Preserve Social Security and Medicare. "This will make it much harder to make this case."

Last year, Social Security's expenditures were $49 billion more than it collected in taxes, the first time it ran a deficit since 1983. Back then, the deficit prompted a bipartisan commission headed by Alan Greenspan to curb benefits, increase FICA taxes and gradually raise the retirement age to push the system back into the black and create a huge reserve for covering benefits of baby boomers who are starting to retire now.

The 2008 recession, with a net loss of 6.8 million jobs, and some workers' decisions to retire early amid the economy's stubborn softness have reduced the system's revenues. With Social Security already paying out more than it takes in, Rep. Raul Grijalva, D-Ariz., a leader of House liberals, said he worries that financing part of the program from the overall federal budget leaves it relying on "the most tenuous of any source of revenue, especially in these times."

Social Security, created in 1935, pays its beneficiaries from payroll taxes collected from workers and companies and from interest earned by the trust fund where those taxes are deposited. The government collected $638 billion in payroll taxes last year and its trust fund is worth around $2.5 trillion.

That $2.5 trillion, though, is not sitting in a government vault. The government has borrowed it, and it's one big component of the nation's $14.3 trillion federal debt..

By law, the money is invested in special Treasury bonds -- in effect a promise that the government will repay the Social Security system when the money is needed, plus interest. Meanwhile, with the federal budget running annual deficits exceeding $1 trillion, the government uses the trust fund cash to help pay for all its other programs.

This has long fueled a debate over Social Security's soundness.

Critics say the program's trust fund is nothing more than a mountain of IOUs, money the cash-strapped government would be hard pressed to repay. Others counter that a federal promise to provide Social Security with cash has always been as good as gold and any politician hedging on the bonds owned by the deeply popular program would do so at his own risk.

Obama's proposal to cut the payroll tax and finance part of Social Security from the overall federal budget has added has added a new twist to the debate.

Some analysts say Texas Gov. Rick Perry, the Republican presidential hopeful, goes too far in calling Social Security a "Ponzi scheme" and denying the validity of its financing. But they also say Obama's payroll's tax plan focuses attention on how the system is more and more based on government promises, not on the hard cash raised through FICA taxes.

"A Ponzi scheme is fraudulent. This is not intended to be fraudulent," said Robert Bixby, executive director of the nonpartisan Concord Coalition, which advocates a balanced budget. "But it points out that the system is underfunded and is promising benefits it can't afford."

Obama and Congress agreed in December to cut the 6.2 percent payroll tax that workers pay on their wages to 4.2 percent in 2011 as part of a deal continuing former President George W. Bush's 2001 and 2003 tax cuts. That cost Social Security $112 billion -- money the government is making up by putting an equal amount of additional IOUs in the system's trust fund.

Now Obama is proposing an even costlier plan for 2012. He would halve workers' payroll taxes from 6.2 percent to 3.1 percent -- about $1,500 a year in savings for a family earning $50,000.

He would also cut the matching 6.2 percent Social Security tax that employers pay to 3.1 percent for their first $5 million in payroll next year. And he would eliminate employer-paid Social Security taxes in 2012 for some new workers or on increased pay for current employees. He would reimburse the trust fund with another $240 billion in IOUs.

Many analysts say that technically it makes little difference whether money going into Social Security's trust fund comes from the payroll tax or from other government revenue. Either way, the cash purchases special bonds that are banked in the trust fund.

"It will in no way weaken the Social Security fund," Robert Reischauer, former head of the nonpartisan Congressional Budget Office and one of six trustees who oversees Social Security, said of partially financing the program with general revenues.

White House spokeswoman Amy Brundage said that, under Obama's proposal, "Social Security will still receive every dollar it would have gotten otherwise."

But for politicians, other questions are involved.

Polls show Social Security is hugely popular across party lines, particularly with elderly people who vote in high numbers. There are plentiful recent examples of the program's political potency.

When Democrats and Republicans fought over budget surpluses that emerged briefly in the late 1990s, President Bill Clinton headed off large GOP tax cuts by saying the extra money should be used to buttress Social Security. In 2000, Democratic presidential candidate Al Gore tried capitalizing on that same sentiment with his proposal to keep parts of the surplus in a "lockbox" for Social Security.

And in 2005 after his re-election, President Bush saw his plan to let Social Security recipients turn benefits into stock market investments quickly go down in flames.

This summer, Obama and House Speaker John Boehner, R-Ohio, failed to reach a "grand bargain" for cutting federal debt by $3 trillion or more. Their discussions included curbing how Social Security benefits would grow to reflect inflation -- a bold proposal that would have posed risks for any politician who backed it.

With next year's presidential and congressional elections on the horizon, lawmakers remain eager to demonstrate support for the program. Underscoring that sensitivity, House Minority Leader Nancy Pelosi, D-Calif., gave an ambivalent response last week when asked if there was concern that Obama's proposal would threaten Social Security's financial soundness.

"Let's put it this way," she said. "It doesn't mean that every piece of everything the president said, that everybody was saying, 'Oh, my gosh, I am so glad about that.'"

[Associated Press; By ALAN FRAM]

Associated Press writers Stephen Ohlemacher and Jim Abrams contributed to this report.

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