Payroll Tax Cut and Social Security Benefits

News came President Obama and Republicans agreed to a “payroll tax holiday” in 2011. For one year only, an employee’s portion of the Social Security tax will be reduced from 6.2% to 4.2%. This will replace the Making Work Pay tax credit in effect in 2009 and 2010.

Making Work Pay is a flat tax credit: $400 single, $800 married, with a phaseout range. If the payroll tax cut becomes law, the Social Security tax cut will be much larger than Making Work Pay. It also varies with your pay. The more you make, up to $106,800 per worker, the more you benefit.

On the high side, if a couple both work and earn $106,800 each, they will get a tax cut of $4,272. Whereas they possibly couldn’t qualify for Making Work Pay in 2009 and 2010, they will get five times as much in 2011. On the low side, if a single person works and earns $10,000, the payroll tax holiday gives only $200, compared to $400 under Making Work Pay. The variable nature makes the new payroll tax cut more true to the name of making work pay.

It’s also a tax cut that can’t be taken away by AMT. The payroll tax is separate from the income tax. Therefore it can’t be affected by AMT.

With a lower contribution to Social Security, will the employee’s Social Security benefits be affected? Not really. One’s Social Security benefits are driven by the Social Security eligible income, not by the taxes one pays into Social Security. The taxes we pay today go to someone else anyway. The income used in the Social Security benefits calculation will be the same.

Of course Social Security as a whole will receive less cash while its promised benefits stay the same. It just has to redeem some of those IOUs it received in the past. When the money runs low, someone in the future will make up the difference.

Pay less now and get the same benefits in the future. Good deal, eh?

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  1. enonymous says

    Good deal, eh?

    Obviously not.

    The lower payroll tax and the entire tax package is a farce.
    1.) We will never find ‘the right time’ or the ‘right President’ or the ‘right number of votes’ to raise taxes.
    2.) Raiding the SS fund (which is what this does) to pay us all a little more now only iensures that the insolvency of the SS trust fund will occur that much sooner, which means that yearly benefits will be decreased (perhaps by income levels, perhaps not) and total benefits will be decreased as the retirement age gets nudged to over 70.

    Can you show me a deal where I can pay less now and get the same thing later? If so, I have bridge…

  2. Random Poster says

    “For one year only, an employee’s portion of the Social Security tax will be reduced from 6.2% to 4.2%.”

    I’m a bit confused what exactly this will mean in practice.

    Does this mean that the maximum social security tax is now only $4485.60, instead of $6621.60? If so, is the amount taken out of each paycheck 4.2% of my earnings? Or is 6.2% still taken out of my earnings every paycheck until $4485.60 has been paid (so as to provide the 4.2% contribution, while still taking it out at the previous 6.2% rate)?

  3. Harry Sit says

    enonymous – Sorry about the tongue-in-cheek. Someone else told me the Social Security tax cut will be paid from the general fund. The SS trust fund will be made whole by the general fund borrowing less from it. For example, suppose without the payroll tax holiday SS will receive $1,530 billion and pay out $1,200 billion. It will lend $330 billion to the general fund and receive $330 billion in non-marketable Treasury IOUs. Now with the payroll tax holiday, it will receive $1,330 billion, pay out $1,200 billion, lend $130 billion to the general fund and still receive $330 billion in non-marketable Treasury IOUs. The SS trust fund is made whole. Its long-term solvency isn’t affected.

    For the country and all generations as a whole, you can’t pay less now and get the same thing later. Individually, you definitely can. All the reforms will protect the benefits for those over 50 (give or take). Once you are over 50, you are golden. You can vote for payroll tax holiday every year and let the younger generation worry about how to pay you.

  4. harry says

    TFB, I get your point, but the money is all coming/going to the same place, the government. The net sum of money the government has is still going to be reduced by this lowering of the tax, which is what I think the other posters are eluding to.

    Personally, I think the taxes should remain the same, and we should privatize many sectors of the government to start reversing our national deficit. Have you ever been to the DMV? Enough said…

  5. Harry Sit says

    @Random Poster – I expect the payroll withholding will be changed to 4.2%.

    @ClaireTN – Of course there aren’t many details but I don’t think the self-employed will be left out. They were eligible for the $400/$800 Making Work Pay. 6.2% as employer and 4.2% as employee for a total of 10.4%, instead of the usual 12.4%, up to the $106,800 Social Security Wage Base. Plus 2.9% unlimited for Medicare, same as before.

  6. Harry Sit says

    @Keen Observer – I guess so. The general fund will make up the difference to the Social Security trust fund. It’s unlikely it will give a similar grant to your pension fund. Without a revenue offset, your pension fund is not going to give you a break. A pension fund in lieu of participation in Social Security pays more than Social Security, doesn’t it?

  7. Keen Observer says

    If the goal is stimulus via paycheck, why would teachers, cops, firefighters and other city and state employees be left out?

    We have 7 furlough days this year, which equates to financial pressure.

    It’s true that pensions offer higher retirement benefits, but I pay in 8% rather than the 6.2% people pay into Social Security.

  8. OH says

    Hi, others have already asked questions I was interested in. Is it possible for the House of Representatives in 2011 to interfere with the re-imbursement?

  9. Harry Sit says

    @OH – Do you mean the reimbursement from the general fund to the Social Security trust fund? In general, Congress makes laws, the President signs laws, and courts strike down laws. Together, they can always change the law whenever they feel like. All three must cooperate. Representative democracy at work.

  10. Betty Merkley says

    Mt question is with less going into SS because of the tax break does that mean ww will have to go again without a cost of living to our SS checks again?

  11. Harry Sit says

    Betty – The SS cost of living depends 100% on the consumer price index. It has nothing to do with how much SS collects in taxes. If the CPI goes up high enough, there will be a cost of living increase. If the CPI stays low, there won’t be one. The increase in 2008 was unusually high, caused in part by the $4 gas. Since then the inflation has been low, sometimes negative.

  12. Steve Moore says

    I was looking at two check stubs from Dec 2010 and two from Jan 2011 and it apears that I paid more fed income tax on the checks in 2011, is the money taken out of my SS being tax on my check? Does this mean that through this “tax cut” the fed gov is collecting more money?

    • Harry Sit says

      @Steve – Taxes withheld from your paycheck are not the same as taxes you ultimately pay. The Making Work Pay tax credit expired in 2011. That’s why you are seeing a higher withholding. The Social Security tax cut is on a different line on paychecks. Employers are given some extra time to make changes to payroll systems. You will see the cut shortly and everything will be caught up eventually. Don’t worry.

  13. anoNY says

    “When the money runs low, someone in the future will make up the difference.”

    Isn’t this the mindset that will get us into trouble?

  14. Harry Sit says

    @anoNY – Sorry about the mild sarcasm. Yes that’s the mindset. Borrow from the future to live it in the now. Put it on the credit card. Send the bill to the kids.

  15. Bart Woolery says

    SS will not see less income, as the “lost” income will be replenished through the general fund, as stated in the bill. Thus, the overall effect is simply to give working people more money and the exact same SS benefit (provided the Republicans don’t successfully eviscerate SS by your retirement time).

  16. Keith says

    SS SUCH A SIMPLY FIX.IF YOU MAKE $50000 a year pay on it and if you make $1,000,000 pay on it. OTHER WORDS PAY YOUR FAIR SHARE RICH 0R POOR.

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