Last week, Congress and President Obama extended the 2011 payroll tax holiday into the first two months of 2012. It is not yet clear how the holiday, which shaves two percentage points off workers’ Social Security tax rates, has affected consumer demand and the overall economy. But, it is all too clear that the holiday’s diversion of general revenue from the Social Security trust fund has undermined historical practices and distorted federal budgetary priorities.
Throughout its history, Social Security has been treated as separate from the rest of the budget. With few exceptions, it hasn’t had to compete with other programs for its share of general tax dollars and it hasn’t been cut to reduce the general budget deficit. Social Security has been given this special treatment on the grounds that it’s a self-supporting program which finances all of its benefit payments from its own earmarked payroll tax revenue.
While being spared from normal budget scrutiny, Social Security has been subject to a different budgetary limit. Precisely because it’s supposed to be self-supporting, its benefit payments have been limited to the amount that can be covered from its payroll tax revenue. Any payroll taxes not immediately spent are lent to the general treasury, to be repaid with interest, as tracked by a trust fund accounting mechanism. For example, the $1.2 trillion of surplus payroll taxes collected in 1984 through 2009 are being repaid to the Social Security trust fund, along with $5.1 trillion interest, from 2010 through 2036. Read full analysis at AEI>>>>