Don't drain Social Security.
Congress and the White House soon will resume their fight over a Social Security payroll tax holiday, having approved a two-month extension of the one-year rollback that was scheduled to expire on Jan. 1.
The fight will be a struggle for short-term political advantage, and there's a real danger that neither Democrats nor Republicans will focus on the most important issue: the integrity of the Social Security system.
The Social Security system's strength rests on the fact that it is financed by its own tax - 6.2 percent of each worker's income, up to a maximum of $106,800, with an equal amount paid by employers. This year's tax holiday reduced employees' rate to 4.2 percent, resulting in about $25 a week in additional take-home pay for the average worker.
While everyone welcomes what amounts to a pay raise, the lower rate means a $121 billion reduction in funding for a program that will provide $727 billion in benefits to 54 million Americans this year. The tax helps guarantee that all workers will receive a modest income in retirement and ensure a degree of income security for people who become widowed, orphaned or disabled.
The Social Security system has been collecting more money than is needed to pay current benefits, building up a $2.4 trillion surplus to cover the surge that is now gathering force in retirements by baby boomers. In 2010, the system began drawing down its surplus, paying $49 billion more in benefits than it received in payroll taxes.
The surplus and continuing taxes will provide funds sufficient to cover benefits until 2036. After that, the system's resources will cover only three-quarters of projected benefits.
The shortfall in Social Security revenues is a serious but manageable problem. Some combination of payroll tax increases and benefit reductions can bring revenues and obligations into balance. With nearly a quarter-century of lead time, the adjustments can be relatively minor - the maximum income subject to the payroll tax could be raised, or the formula for cost-of-living increases could be modified.
The payroll tax holiday, however, brings the date of insolvency closer, thereby making necessary more drastic adjustments. The difficulty of ensuring the system's long-term solvency grows each time the payroll tax cut is extended.
The politics of the payroll tax cut create a risk that it will be made permanent. In this month's showdown, President Obama borrowed a rhetorical trick from the Republicans and characterized a failure to extend the lower rate as a tax increase. Such a characterization will make it hard for any politician to support allowing the payroll tax to revert to its former level of 6.2 percent.
Social Security revenues lost because of the payroll tax holiday are supposed to be replaced with other funds - in the case of the two-month extension, with money from higher federal mortgage insurance rates. Such replacements are vital to the system's financial integrity, but they create a risk of their own: For the first time, Social Security is dependent on general tax revenues.
A dependence on general fund transfers makes Social Security a part of the debate over annual budget deficits and the accumulating national debt. Until now, Social Security has stood apart from that discussion because of its self-financing mechanism. Each extension of the lower payroll tax rate, however, makes Social Security a target for deficit and debt reduction.
If all of government operated like Social Security - with pay-as-you-go financing, a large surplus to cover a surge in demand and long-term solvency achievable with small adjustments - the country would be in good fiscal shape. Instead, Social Security's finances are being made to resemble those of the government at large.
It's a dangerous path. The self-financing nature of Social Security must be restored, removing the program from day-to-day budget battles.
And the sooner the better.