The coming fiscal cliff’s mix of tax hikes and spending cuts are projected to seriously hamper economic growth over the next two years, and Congressional leaders would be wise to negotiate fixes for the problems. One of the more popular potential fixes, however, is only going to hasten the coming entitlement crisis by worsening the finances of Social Security.
A one-year extension of the employee-side payroll tax cut was passed in December of 2011. It’s scheduled to lapse along with the other fiscal cliff policies in 2012. This is a particularly popular tax cut because it goes by and large to lower- and middle-income Americans. Payroll taxes, however, are the way that Social Security gets finances. Foregoing that revenue will only make it worse.
Social Security’s finances are permanently in the red. It was in 2010 that benefits paid exceeded revenue collected for the program – and the program is never projected to recover. Cutting payroll taxes further will only worsen the coming Social Security crisis.