What The New Payroll Tax Proposal Means For Your Social Security

A claim too good to be true? If the recent tax compromise forged between President Obama and Congressional Republicans becomes law, payroll taxes would be lowered by 2.0% in 2011. According to the Joint Committee on Taxation, that would cost the federal government $111.7 billion. The White House claims this drop in tax revenue would have no impact on Social Security’s solvency.(source)(source)

In response, some legislators and analysts are raising their voices, worried that the proposed payroll tax holiday could be a harbinger of unpleasant things to come for America’s retirement program.

How could you pull this off without hurting Social Security? Good question. As Social Security (and Medicare) rely on payroll levies for a great deal of revenue, chopping those taxes down from 6.2% to 4.2% in 2011 would seem to be harmful.(source)

The federal government’s answer to that question: reimburse the loss to the Social Security Trust Funds using general revenue. That idea worries Social Security advocates, and it also begs a question.

The “what if” some analysts, not all,  fear. What if the planned payroll tax cut becomes permanent? It could happen, especially with conservatives in control of the House. The EGTRRA tax rates were conceived as temporary, and they are starting to seem more permanent with each passing year. To others, stability in known income tax rates would be good for the economy.

Last week, Sen. Mike Johanns (R-NE), Sen. Bob Corker (R-TN) and Rep. Ted Deutsch (D-FL) all told NPR they felt conservative Congressmen would try to make the payroll tax reduction permanent during 2011. Deutsch warned that a move to fund Social Security with general revenue will hearten “those who [want] to move away from our longstanding, successful Social Security program to privatization and to benefit cuts. It will enable them to make those arguments in a way that they’ve never been able to make them before.”(source) Is it possible to have differing opinions on how to fix Social Security? Let’s hear all voices in this discussion!

Nancy Altman, co-chair of the advocacy group Social Security Works, thinks a lasting cut in payroll levies could end up making Social Security’s shortfall twice as large as it is now. She warned NPR with the probable extension of EGTRRA and JGTRRA, “we see now that it’s very hard once a tax cut is in place to repeal it,” and told USA TODAY that “it’s unfathomable that this is going to last only one year.”(source)(source)

The 2011 tax break might be less prevalent than assumed. The federal government says a 2% payroll tax cut could provide tax breaks as large as $2,000 in 2011 for American workers. But as Bloomberg Businessweek reported on December 10, any Congressional vote might happen too late for some employers to act. Last year, the IRS notified payroll departments about 2010 tax tables on November 20. We are well past that date.(source)(source)

Incidentally, the envisioned payroll tax cut is for workers only, not businesses. The payroll tax would stay at 6.2% for employers in 2011.(source)

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