Extending the Payroll Tax Cut: A Vote to Eliminate Social Security As We Know It

The current debate with Congress and the president about extending the Social Security payroll tax cut appears to be about taxes, but taking a longer view, that is a small part of what is being considered.

The Social Security program has been based on the premise that it works like a pension program. Workers pay in to the program when they are working, and then collect pension benefits when they retire. Retirees are entitled to those benefits because they paid for them through the payroll tax when they were working.

Despite the fact that the Social Security program is run like a Ponzi scheme, the entitlement aspect of the program is difficult to argue against. Workers have been told all their lives that in exchange for paying the payroll tax, they are entitled to retirement benefits.

The payroll tax cut severs that link. The payroll tax has been cut in half, and the difference is being made up from general revenues. Workers can no longer say they paid their taxes and are entitled to their benefits, because half of those taxes are now coming from general revenues, just like any other entitlement program.

If the payroll tax cut is temporary, the link between taxes and benefits will remain. But for every year the payroll tax cut is in effect the link becomes more tenuous, and if the tax cut is made permanent, the link will be gone. Seniors will no longer be able to say they are entitled to benefits because they paid for them through payroll taxes.

The real debate not over whether keep a tax cut, it is whether to continue the transformation of the Social Security program from a pension program into a means-tested welfare program.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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