WASHINGTON - President Obama's plan to cut payroll taxes for a year would provide big savings for many workers, but makes Social Security advocates nervous that it could jeopardize the retirement program's finances.
The plan, backed by Republicans, is part of a package of tax cuts and extended unemployment benefits that Obama negotiated with Senate GOP leaders.
It would cut workers' share of Social Security taxes by nearly one-third for 2011. Workers making $50,000 in wages would get a $1,000 tax cut; those making $100,000 would get a $2,000 tax cut.
The government would borrow $112 billion to make Social Security whole. That has prompted worry that relying on borrowed money to fund Social Security could one day force it to compete with other federal programs for scarce dollars, leading to benefit cuts.
Social Security taxes "ought to be held sacrosanct," said Rep. Earl Pomeroy (D., N.D.), chairman of the House Ways and Means subcommittee on Social Security.
"When you start to signal that the [Social Security] tax levels are negotiable, you end up in long-term trouble, I think, in terms of making absolutely certain that the entitlement funding streams are secure," Pomeroy said.
Social Security is funded by a 6.2 percent payroll tax on the first $106,800 earned by a worker. The tax is matched by employers. The tax-cut package would reduce the tax paid by workers to 4.2 percent for 2011. Employer rates would stay unchanged.
Administration officials and others say a payroll tax cut is an efficient way to stimulate the economy by immediately increasing take-home pay for 155 million workers. The nonpartisan Congressional Budget Office agrees, and many business groups and Republicans support it.
Backing the deal, the United Auto Workers said, "Working families will likely spend this money in their local communities, creating jobs and stimulating overall growth."
But the leader of a Social Security advocacy group said "this 2 percent payroll tax cut is the beginning of the end of Social Security as we know it."
"Worker contributions have successfully funded the program for 75 years and that critical linkage between contributions and benefits is what keeps Social Security a self-funded program," said Barbara B. Kennelly, a former Democratic congresswoman from Connecticut who heads the National Committee to Preserve Social Security and Medicare.
The payroll tax cut, part of a larger package that also extends the full array of Bush-era tax cuts that are scheduled to expire at the end of the month, would replace Obama's Making Work Pay tax credit, which has provided modest increases in most workers' paychecks for the last two years.
Social Security has accumulated a $2.5 trillion trust fund since the 1980s. But the government has borrowed that money to pay for other programs. Treasury has issued bonds to Social Security, guaranteeing the money will be repaid, with interest.
But as baby boomers start to retire, advocates worry about future benefit cuts. This year, for the first time since the 1980s, Social Security will pay out more in benefits than it collects in payroll taxes.