The Social Security Payroll Tax Cut

Anyone trying to understand what's really happening with the Social Security payroll tax cut is going to find him/herself dealing with a) people who don't know what they're talking about, and b) people who know what the story is, but are trying to mislead you.

In Category A, among legions of others, we can put David Welna of National Public Radio, who authoritatively reported today:

Fact No. 3: The payroll tax holiday that Congress approved a year ago reduced Social Security's revenues this year by $145 billion.

An erratum added to the story later said:

A previous Web version of this story incorrectly said that the payroll tax holiday approved by Congress a year ago reduced Social Security's revenues this year by $145 billion. The correct amount is $105 billion.

Actually, the correct amount is $ 0.00. The payroll tax cut has resulted in absolutely no loss to the Social Security trust funds. That's because of section 601 of the Tax Relief Act, which states:

There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the application of subsection (a). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted.

In plain English, the section provides that the payroll taxes lost to the Social Security trust fund because of the payroll tax cut are replaced out of general revenues. Now you can say that's a good thing or a bad thing (I'd say "almost certainly bad," but that's a different post), and it's certainly increasing the debt, but you can't say Social Security's revenues have been reduced.

Reporters need to do their homework. The web makes it a lot easier than it used to be, and if Welna had done a simple Google search, he could have written an accurate story.

So thanks to Amy Bingham at ABC News, who reported:

The one-year cut to Social Security’s funding stream decreased federal revenues by $112 billion in 2011, but the already-dwindling trust fund for Social Security remained untouched  because the government borrowed extra money to fill the gap, adding instead to the $1.3 trillion deficit.

Then there's Category B, the people who are trying to mislead you. Among these are Illinois Senator Mark Kirk, as this video of a statement he gave in front of an empty Senate chamber clearly shows:



Listen to him as he talks about proposals that would "underfund" Social Security by $250 billion. These proposals have the same mechanism as Section 601, above, so they do not underfund Social Security. But keep listening past the short sound glitch in the video, and you discover that he knows it's not true! He knows it, but he's saying it anyway.

We know he knows it because he starts talking about the injustice of replacing Social Security tax revenues with U.S. Treasury Bonds that are rated less than AAA. The bonds are the payment from the general fund.

But, whah? Where did he think the payroll taxes were going, into a sock? They're going into special U.S. Treasury Bonds. And they're rated less than AAA only because of that little episode where the Republicans threatened default on America's debt if taxes were raised on millionaires.

 It's like the old story of the guy who killed his parents, then begged the court for mercy because he was an orphan. Well, not exactly like it, but you get the point.