Payroll Tax and Social Security, What Could It Mean?

Will it happen?  Lawmakers have been busy and a lot of the buzz has been on payroll taxes and Social Security.  As a boomer, do you have a reason to be concerned.  The simple answer: maybe.

A claim too good to be true? If the recent agreement on taxes 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.

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.

Is there a way that wouldn’t affect 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 ruinous.

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.

What Should We Be Worried About?

What if the planned payroll tax cut becomes permanent? It could happen, especially with Republicans in control of the Senate. The EGTRRA cuts were conceived as temporary cuts, and they are starting to seem more permanent with each passing year.

Last week, Sen. Mike Johanns (R-NE), Sen. Bob Corker (R-TN) and Rep. Ted Deutsch (D-FL) all told NPR that they felt Republicans 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.”3

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 that 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.”3,4

By the way, 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.2,3

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

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