Last week, Congress and President Obama extended the 2011 payroll tax holiday into the first two months of 2012. It is not yet clear how the holiday, which shaves two percentage points off workers' Social Security tax rates, has affected consumer demand and the overall economy. But, it is all too clear that the holiday's diversion of general revenue from the Social Security trust fund has undermined historical practices and distorted federal budgetary priorities.

Throughout its history, Social Security has been treated as separate from the rest of the budget. With few exceptions, it hasn't had to compete with other programs for its share of general tax dollars and it hasn't been cut to reduce the general budget deficit. Social Security has been given this special treatment on the grounds that it's a self-supporting program which finances all of its benefit payments from its own earmarked payroll tax revenue.

While being spared from normal budget scrutiny, Social Security has been subject to a different budgetary limit. Precisely because it's supposed to be self-supporting, its benefit payments have been limited to the amount that can be covered from its payroll tax revenue. Any payroll taxes not immediately spent are lent to the general treasury, to be repaid with interest, as tracked by a trust fund accounting mechanism. For example, the $1.2 trillion of surplus payroll taxes collected in 1984 through 2009 are being repaid to the Social Security trust fund, along with $5.1 trillion interest, from 2010 through 2036.

"If we keep using general revenue to pay for Social Security, we should turn the program into just another line item in the budget and force it to compete with other programs for its share of budget resources."--Alan Viard
Unfortunately, the tax holiday legislation adopted a year ago, and extended last week, undermines this delicate balance. It diverts $130 billion from the general treasury into the Social Security trust fund, to make up for the lost payroll tax revenue. The program will be allowed to spend this money on benefits, even though it never collected it in payroll taxes.

Diverting general revenue to the trust fund destroys budget discipline by improperly giving Social Security the best of both worlds. The program continues to escape normal budget scrutiny on the grounds that it's self-supporting but is no longer required to actually support itself.

At first glance, transferring general revenue to the trust fund may seem appealing. The transfer allows us to enjoy a $130 billion payroll tax cut today without having to cut future Social Security benefits or raise future payroll taxes to make up the revenue loss. But, the need to make up the revenue loss hasn't disappeared - it's just been shifted elsewhere. Rather than cutting Social Security benefits or raising payroll taxes, we will have to cut other programs, such as national defense, Medicare, and Medicaid, or raise income taxes. Allowing Social Security to use the general treasury as a piggy bank distorts budgetary priorities, allowing it to expand at the expense of other programs and revenue sources.

The tax holiday is the latest, and largest, of Social Security's raids on the general treasury. For example, the 2009 stimulus package provided an extra $250 benefit payment to Social Security recipients and billed the cost to the general treasury. And, the jobs bills adopted in March 2010 and November 2011 trimmed Social Security taxes for some employers and tapped the general treasury to make up the loss. Numerous small transfers from the general treasury have occurred over the years.

If we keep using general revenue to pay for Social Security, we should turn the program into just another line item in the budget and force it to compete with other programs for its share of budget resources. The best approach, though, is to halt the use of general revenue and return Social Security to its historical role as a self-supporting program.

We should honor Social Security as an important program that helps tens of millions of people every month. But, we should also insist that it pay its own way.

Alan D. Viard is a resident scholar at AEI