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Tuesday, March 6, 2012

Social Security: Temporary Payroll Tax Reduction

Dawn Nuschler
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 was 4.2% for employees and 10.4% for self-employed workers. P.L. 111-312 made 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). It provided general revenue transfers to the Social Security trust funds to make up for the loss of payroll tax revenues. A worker’s future benefits are not affected.

The temporary reduction in the payroll tax for employees and the self-employed in 2011 was 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) was lower by about $894. The annual Social Security withholding for a worker earning the maximum taxable wage ($106,800 in 2011) was lower by $2,136.

On December 23, 2011, a measure to extend the payroll tax reduction for workers for two months (through February 2012) was passed by the House and the Senate and signed into law by President Obama (H.R. 3765, P.L. 112-78). On February 17, 2012, the House and the Senate agreed to the conference report on H.R. 3630, which further extends the payroll tax reduction for workers through the end of calendar year 2012. H.R. 3630 was signed into law by President Obama on February 22, 2012 (P.L. 112-96). The Social Security payroll tax for workers in effect through December 2012 is 4.2% (rather than 6.2%).

The temporary reduction in the Social Security payroll tax for employees and the self-employed has drawn mixed reactions from policymakers. Some observers express concern about the potential impact of the 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 continue to extend the payroll tax reduction 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 self-financing 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 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.

Date of Report: February 23, 2012
Number of Pages: 14
Order Number: R41648
Price: $29.95

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