The President reached a tax-cut deal with congressional leaders earlier this December that includes extending the expiring “Bush Tax” cuts and unemployment benefits for another year. The tax-cut deal also includes a “temporary” one-year social security payroll tax cut from 6.2% to 4.2%. The social security payroll tax funds social security and applies to the first $106,800 earned by workers. Employer rates would stay unchanged. While the social security payroll tax cut will result in more money in worker pay checks, it has many advocates and defenders of social security concerned that this could spell the end of a solvent retirement program.
The social security payroll tax cut represents a 25% tax cut on this item, for workers. For example, according to the Associated Press, “workers making $50,000 in wages would get a $1,000 tax cut; those making $100,000 would get a $2,000 tax cut.” Sounds great, however, how and when do we pay the program back as the government has promised to do? The government would have to borrow about $112 billion to make Social Security whole.
“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,” . Earl Pomeroy, D-N.D., chairman of the House Ways and Means subcommittee on Social Security was quoted as saying according to the Associated Press.
The Obama administration believes that a payroll tax cut is an effective way to stimulate the economy by immediately increasing take home pay for many workers. The tax cut would impact about 155 million workers. Importantly, the Congressional Budget Office, a nonpartisan body, agrees. Additionally, the tax cut has the support of many business groups as well as both Democrats and Republicans. This legislation is just part of a series of laws signed into law in 2010 that will have a significant impact on our financial futures.
According the Los Angeles Times, a survey shows that while public support for the overall tax package is 69%, 57% of the respondents opposed the payroll tax cuts. We will have to watch and see if this “temporary” tax cut will be extended beyond 2011. It may depend on how the economy is doing going into 2012, although in general, social security coffers are already being drawn upon in record numbers by baby bombers, early retirees, and the unemployed who are trying to make ends meet. Reducing what is being contributed into the account concerns me. A well explained and publicized plan to ensure that social security will be reimbursed would go a long way to making me feel better, although the uncertainty of social security is why I do not rely on it in my financial planning. I see it as gravy. I advise others not to rely on it heavily as well by using other methods to reduce reliance on the program.
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