The payroll tax cut, Social Security and the problem of the trust fund

By Ezra Klein

The tax deal cuts employee-side payroll taxes by two percentage points in 2011. This won't harm Social Security, or at least it shouldn't harm Social Security, because the money will just be replaced by general fund revenues (confused yet?). All in all, that should mean Social Security emerges unscathed.

But some liberals are understandably concerned that the payroll cut will be extended indefinitely. Then Social Security loses part of its long-term funding. And then what? More benefit cuts? Privatization?

I say, bring it on. Cutting payroll taxes and replacing them with general fund revenues is appealing in two ways. First, payroll taxes are much more regressive than income taxes. Second, I'm actually fine with breaking the sanctity of Social Security's closed funding loop. A lot of liberals disagree with me on this point, but hear me out.

Historically, Social Security has paid for itself through payroll taxes. But because Americans began having fewer kids during the 20th century, it's no longer paying for itself through payroll taxes. So now many in Washington want to cut the program's benefits to bring its spending in line with its trust fund.

But there are lots of programs and priorities that don't pay for themselves. The Defense Department, for instance. The United States Congress. The mortgage-interest tax deduction. There's no reason we can't preserve Social Security's benefits by spending somewhat more of our general fund revenues on Social Security and somewhat less of them on Medicare or tax cuts for the wealthy or incentives to buy big homes.

There's an argument in liberal circles that Social Security's funding structure, rather than its benefits, are what keeps it safe, as people feel they paid into the program and so protect it from attempts to cuts its benefits later on. I just don't buy it: Medicaid, the Earned Income Tax Credit, the military, farm subsidies and plenty of other policies that aren't pay-as-you-go have survived and prospered because they were popular with the American people, not because they had a particularly appealing funding structure. Moreover, its funding structure is currently forcing cuts that I think to be a bad idea, and that are decidedly unpopular. So whatever protection it once offered, it's now pushing in the opposite direction.