A big battle over bad public policy
Last week's bruising battle over the payroll tax extension will be played out again in just a few weeks, and it's over a measure that could cause more long-term harm to Social Security.
If anyone needed any further evidence for why Congress' approval rating is at historical lows — 11 percent of people think Congress is doing a good job according to the Gallup organization — they need only to look at last week's battle over extending the payroll tax cut through February.
It was a bruising political battle over an issue that the leaders of both parties thought had been settled, albeit temporarily, and that is bad public policy in the first place. It sets the stage for an even more intense fight early next year.
By playing Scrooge at Christmas, House Republicans handed a major political victory to President Obama and Democrats and put egg on the face of their leader, Speaker of the House John Boehner.
The measure extends the 2 percentage point cut in the Social Security payroll tax worth about $1,000 a year for a worker making $50,000 and prevents almost 2 million unemployed people from losing jobless benefits averaging $300 a week. And doctors dodge a 27 percent cut in their Medicare payments supposed to take effect Jan. 1.
As part of the bargain, Republicans won a concession that would require Obama to make a swift decision on whether to approve construction of the Canada-to-Texas Keystone XL oil pipeline, a decision he had wanted to put off until after the 2012 election.
We have no quarrel with extending the unemployment benefits in this time of high unemployment, as long as there's a way to pay for it. And Congress will have to find a way to permanently address the cut in Medicare payments to doctors, which has been delayed repeatedly since a budget law was passed in 1997.
But the payroll tax cut is bad policy, and here's why.
First of all, it's more uncertainty for businesses, both large and small. What business plans in two-month increments? It's also a cost, as businesses have to adjust their payroll processes.
More importantly, it hurts Social Security in the long run.
The 2 percent payroll tax cut was adopted supposedly for one year in 2010 to put more spending money in people's hands and thereby stimulate the economy. Arguably, it has contributed to economic growth, and if the payroll tax cut and long-term unemployment benefits hadn't been renewed for 2012, economists said the modest growth rate of 2.5 percent they predict for next year would be a full percentage point lower.
But critics such as Illinois Republican U.S. Sen. Mark Kirk say the payroll tax cut puts Social Security in jeopardy, and they're right. Social Security, which is currently spending more than it's taking in and faces unsustainable long-term deficits, will run an even larger deficit.
The payroll tax cut gives lie to the claim that Social Security is somehow above the fray in budget discussions. It's now been used for political purposes to its detriment. Social Security maintains a $2.3 trillion trust fund. But that fund is made up of government treasury securities that the government repays by incurring more debt. The money lost to Social Security because of the payroll tax cut is supposed to be made up with general government revenues. That opens up Social Security to the grubby political calculations of the Congressional budget process.
And if this is the wrong time to restore the payroll tax on American workers, as Obama and others claim in pushing for the extension, when will be the right time? Next year? Never?
As Charles Blahous, public trustee for Social Security and Medicare, sees it, "Social Security was not established to be a source of 'temporary' stimulus funds. The idea that its payroll tax rate should be moved up and down with economic events is highly dangerous to the program's financial future.
"If Congress continues to cut the program's funding source, one of two things must happen: 1) Social Security's insolvency will be accelerated; or 2) Social Security will have to increasingly rely on general revenues (i.e., income taxes) to pay beneficiaries."
A hardship on American businesses, and we're not only talking about the evil large corporations.
Here's a suggestion to lawmakers. If you really want to cut taxes and stimulate the economy, work out a comprehensive reform of our byzantine tax code. We won't hold our breath.