Payroll Tax Cuts Extended 2 Months, May Hurt Long Term

Journalists and economists are taking a closer look at a fear we expressed a few months ago when we learned that Congress and the Obama administration were considering extending the payroll tax cut. The fear is that the short-term money gained from the cut could come back to hurt Social Security benefits, and many now think that may be the case.

Most Social Security benefits – whether retirement or Social Security Disability Insurance (“SSDI”) benefits – are money that workers already paid into the system. Beneficiaries are receiving money that they paid during their years of work; most Social Security benefits, thus, are self-funded. The problem with the payroll tax cut is that it makes Social Security not entirely self-funded.

For the first time ever in 2011, there was a payroll tax cut for workers to pay less in Social Security taxes. In order to cover the shortfall of money as a result of the tax cut, Social Security took $110 billion from the Treasury. The new, two-month payroll tax cut of 2012 will force Social Security to take another $19 billion from the Treasury. In the past, Social Security benefits were off the table during political talks about budget cuts because they were self-funded. If benefits are no longer self-funded, it becomes more likely that, at some point in the future, there could be cuts to benefits.

The 2011 payroll tax cuts saved households, on average, $900. Social Security benefits are safe for now, but extended tax cuts could comprise future benefits for families. How has the temporary tax cut benefited your family? Are longer term Social Security benefits more important for you than the recent payroll tax cuts?

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