Social Security Doesn’t Contribute to the Deficit? That Was Then…

President Obama and congressional Republicans have agreed on a tax deal that includes a one-year reduction of the 12.4 percent Social Security payroll tax by 2 percentage points. This would increase take-home pay for a typical $40,000 per year worker by around $800, with maximum savings for an earner at the $106,800 tax cap of $2,136.

The intent of the move is to spur consumption by putting more money in workers' pockets, thereby boosting the economy. I'm skeptical of how well this will work—a lot of that money is going to be saved, used to pay credit card bills, etc., but that's not the major issue here.

The question is how should the payroll tax holiday make us think about Social Security? Interestingly, there seems to be some consensus from the left and right on this issue. Chuck Blahous, former policy aide in the Bush administration, writes at e21 that the payroll tax cut implies "a double-dose of new government debt, via a proposed accounting maneuver to disguise the effects of the agreement's payroll tax cut provision." Likewise, Nancy Altman, Co-director of Social Security Works, writes at the Huffington Post that "the innocent-sounding payroll tax holiday … will lead inexorably to killing Social Security." I more or less agree with both of them, although the horse pretty much left the barn on Social Security's accounting, oh, around 25 years ago, when Social Security surpluses started being used to subsidize the rest of the budget.

However, one thing that the payroll tax holiday does clarify is the Left's claim that Social Security is "self-financing" and "doesn't contribute a dime to the deficit." That was their argument for keeping Social Security off the fiscal commission's chopping block: if the program doesn't contribute to the federal deficit, then there's no justification for reducing Social Security as part of a deficit reduction package.

Well, that was then. Today, if we're funding a $120 billion payroll tax cut using general tax revenues—borrowed general tax revenues, remember—then Social Security is no longer self-financing and, yes, it does contribute to the deficit.

Of course, one could argue that Social Security has been adding to the deficit ever since the stimulus bill, which included President Obama's "Making Work Pay" tax credit. This tax credit was explicitly a refund of part of the Social Security payroll tax, financed with other tax revenues. The $116 billion 10-year cost of the payroll tax cut is effectively added to the deficit and the debt, although it remains to be seen if the credit will survive.

A talking point is a terrible thing to waste, which makes me suspect the Left will continue to claim that Social Security doesn't add a dime to the deficit. But if the payroll tax holiday is passed, its untruth should be clear to all.