Thursday, December 22, 2011
Specialist in Income Security
In December 2010, Congress approved a temporary 2 percentage point reduction in the Social Security payroll tax rate for employees and the self-employed in 2011 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The Social Security payroll tax rate in 2011 is 4.2% for employees and 10.4% for the self-employed. The law makes no changes to the Social Security payroll tax rate for employers (6.2%) or to the amount of wages and net self-employment income subject to the Social Security payroll tax ($106,800 in 2011). An individual’s future Social Security benefit amount will not be affected.
The temporary reduction in the payroll tax for employees and the self-employed in 2011 is intended to provide an economic stimulus by increasing workers’ take-home pay. For example, the annual Social Security withholding for a worker earning the average wage in 2011 (an estimated $44,687) will be lower by about $894. The annual Social Security withholding for a worker earning the maximum taxable wage ($106,800 in 2011) will be lower by $2,136.
To protect the Social Security trust funds from a loss of payroll tax revenues in 2011, the law appropriates to the Social Security trust funds amounts equal to the reduction in payroll tax revenues to the Treasury. In August 2011, the Congressional Budget Office estimated that these general revenue transfers to the Social Security trust funds would total $111 billion.
The temporary reduction in the Social Security payroll tax for employees and the self-employed in 2011 has drawn mixed reactions from policymakers. Some observers have expressed concern about the potential impact of the current payroll tax reduction on Social Security’s long-term finances, despite the general revenue transfers to protect the trust funds from a loss of payroll tax revenues. These observers point out that, although the payroll tax reduction is temporary, the possibility remains that Congress could extend the payroll tax reduction beyond 2011 or make the payroll tax reduction permanent in response to political or other pressures. In addition, they maintain that the general revenue transfers to the Social Security trust funds introduce an element of general revenue financing to the Social Security program, signaling a departure from the selffinancing mechanism that has been in place since the program’s enactment in the 1930s that could jeopardize the future of the program.
Others support the current payroll tax reduction on the basis that it will stimulate economic recovery and create jobs at a time when the United States continues to experience high rates of unemployment. They maintain that the immediate increase in take-home pay will spur additional consumer spending, increasing the demand for products and services, which in turn will increase production and employment. Supporters point to the payroll tax exemption for employers in 2010 for hiring certain unemployed workers as a precedent. They also point out that temporarily reducing Social Security payroll taxes is a policy option that has been advanced in various forms by recent deficit reduction commissions, among others, as an effective way to stimulate economic growth and job creation consistent with long-term fiscal discipline.
In recent weeks, several bills to extend and expand the Social Security payroll tax reduction in 2012 have been put forth in the Senate: S. 1917, S. 1931, and S. 1944. Each of the measures failed in the Senate on procedural votes.
Date of Report: December 8, 2011
Number of Pages: 12
Order Number: R41648
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