Ezra Klein offers a rebuttal against concerns that the payroll tax holiday will will jeopardize Social Security:
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.
On the first point, Klein is indisputably correct: payroll taxes are regressive, and not just because they are flat, but also because they are capped. I'm not as convinced on his second point, but it is certainly true that Social Security owes its political durability not exclusively to its funding mechanism but also to the benefits that it delivers.
However, I don't think either of these points address the central problem the payroll tax holiday creates. As should be abundantly clear, by the end of 2011, there will be tremendous pressure to extend the payroll tax holiday, and that pressure will come from both sides of the aisle. At a policy level, Klein's solution makes sense: simply replace the lost payroll tax revenue with funds from the general account. You'd have make some changes to revenue and spending policy in the general account to make this work, but that approach would would allow you to preserve Social Security while making its funding mechanism more progressive. If it could be done, it would be a good thing to do.
The problem here, however, is that it is extraordinarily risky (some might say naive) to assume that Congress will embrace a sensible solution.
The prospect of another hostage crisis next December should alarm us, especially given that (a) not only will Republicans control the House and have a larger caucus in the Senate, but (b) they are already working on setting up the crisis. As I wrote earlier, we now know that the payroll tax holiday was the GOP's preferred stimulus option. Meanwhile, Republicans are already acknowledging that a year from now, there will be tremendous pressure to extend the payroll tax holiday, but they argue that the only way to extend it would be to make Social Security solvent, which is their euphemism for cutting back on Social Security.
Now endorsing any sort of cuts on Social Security seems like a political death sentence. If you weren't watching how this tax cut hostage crisis has played out, you might think that it was Democrats who were setting a trap for Republicans. After all, Democrats should be able to destroy the GOP on this, right? Not only could Democrats argue that no cuts are necessary, they can argue that raising the payroll tax cap beyond it's current $106,800 limit would generate enough revenue to stabilize the system and allow for a lower payroll tax.
It's an argument Democrats can and should win, but if we've learned nothing else from this hostage crisis, it's that "can and should" doesn't mean "will." And betting on on a common sense outcome is a big mistake given the current state of American politics.
Even if Democrats manage to convince the public that their plan is better, Republicans will never support it. Empowered with their majority status in the House and increased numbers in the Senate, they'll hold the payroll tax cut hostage, and their ransom note will be simple: if you give us a bipartisan agreement to "fix" Social Security, we'll give you the payroll tax cut. Otherwise, the tax cut expires.
That will put President Obama in the position of choosing between allowing the expiration of the payroll tax holiday (for which he would be accused of raising taxes) and agreeing to a Republican measure to weaken Social Security. Either way he loses, but assuming that the Republican plan calls for gradual cuts, the "candy now, pain later" option will be to cave into the GOP position -- and suddenly we'll find ourselves in exactly the same position we're in today, a hostage crisis in which a result that was unthinkable just one year earlier suddenly becomes a done deal.