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 is part of a package of tax cuts and extended unemployment benefits that Obama negotiated with Senate Republican 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 about $112 billion to make Social Security whole. Advocates and some lawmakers worry that relying on borrowed money to fund Social Security could eventually force it to compete with other federal programs for scarce dollars, leading to cuts.
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 package negotiated by Obama would reduce the tax paid by workers to 4.2 percent for 2011. Employer rates would stay unchanged.
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Obama administration officials say that a payroll tax cut is an efficient way to stimulate the economy by immediately increasing take home pay for about 155 million workers. The nonpartisan Congressional Budget Office agrees, and many business groups and Republicans support it.
"What came out of the compromise was the idea of the payroll tax holiday, which, frankly, a huge number of economists and other experts had been talking about over the last two years with a lot of support in both political parties," said Larry Summers, Obama's chief economic adviser.
The United Auto Workers endorsed the deal, saying, "Working families will likely spend this money in their local communities, creating jobs and stimulating overall growth."
The payroll tax cut is part of a larger package negotiated by Obama and GOP lawmakers to extend a sweeping array of Bush era tax cuts that expire at the end of the month. Some Democratic lawmakers have balked at the plan, saying it is tilted too much in favor of the rich.
The payroll tax cut would provide relief to any worker earning a wage. It would replace Obama's Making Work Pay tax credit, which has provided modest increases in most workers' paychecks for the past two years.
The proposal requires the Treasury Department to replenish Social Security with other government funds, which would have to be borrowed.