One year after the debt ceiling crisis, Congress and the president again face a series of tough decisions regarding federal spending and deficit reduction. With so much at stake in this debate, we’ll be breaking down the details of the impending across-the-board cuts, also known as sequestration. Check back every Wednesday through October 10 for new posts, and catch up on Budget 101 by reading last week’s lesson and the first post in the series.
Social Security is funded through taxes on payroll, which include contributions from both employers and employees. This tax is officially known as Old-Age, Survivors, and Disability Insurance (OASDI), although it’s commonly referred to as the payroll tax. Currently, the tax rate is 4.2 percent for employees and 6.2 percent for employers on up to $110,000 of income. Before 2011, employers and employees paid the same amount. But the Tax Relief and Job Creation Act in 2010 reduced the tax rate paid by employees because the economic recovery had slowed and the president and Congress sought to boost workers’ take-home pay. The lower-rate “tax holiday” was extended through 2012 and is now set to expire on December 31. The Bush tax cuts are scheduled to expire around the same time, and sequestration — $500 billion in across-the-board cuts in discretionary spending split evenly between security and non-defense programs — also could go into effect after the New Year.
Although the 2012 tax-cut extension was offset by a transfer from the U.S. Treasury to the two Social Security trust funds, both the Old-Age and Survivors Insurance and the Disability Insurance trust funds are on track to be exhausted in the next 30 years — the OASI fund in 2035 and the DI fund in 2016. This does not mean that benefits will suddenly stop at that time. Rather, Social Security programs would be forced to “live within their means” and match payouts to income from payroll taxes, which would not cover the total benefits included in the programs today. According to the Center on Budget and Policy Priorities, the Social Security trust funds could pay for 75 percent of the scheduled benefits after 2033 but would only be able to cover 73 percent by 2086.
Sustaining the current level of benefits requires immediate attention. One way to strengthen the trust funds is to allow the payroll tax holiday to expire. According to trust fund data from the Social Security Administration, the payroll tax holiday reduced the share of income paid through employer and employee contributions to the Social Security trust funds from 82 percent to 70 percent between 2010 and 2011.
Allowing the payroll tax cut to expire may be politically unpopular, but it would be a great step toward protecting Social Security and disability insurance beneficiaries in the future. AAUW’s Public Policy Program advocates for strengthening retirement benefits and programs and for a Social Security program that provides inflation-protected, guaranteed lifetime benefits with a progressive benefit formula, spousal and widow benefits, and disability and survivor benefits. For these reasons, we believe allowing the payroll tax cut to expire is good policy that will benefit the Social Security trust funds in an immediate and tangible way.
Check back on October 3 for our next Budget 101 series post, which will focus on unemployment insurance.
This post was written by AAUW Public Policy Intern Madeline Shepherd.