Payroll tax holiday for Social Security needs an exit strategy

The payroll tax holiday for Social Security, which is scheduled to end in December 2012, needs to have an exit strategy that will improve the program in the coming years, according to a report by the National Academy of Social Insurance.

The tax holiday was enacted under the Tax Relief and Job Creation Act of 2010 and was extended in December 2011 and February 2012. It came about as a way to help bring the country out of recession. Contributions that workers make to Social Security insurance protection were temporarily reduced from 6.2 percent of earnings to 4.2 percent of earnings in 2011 and 2012. Employers continue to pay the 6.2 percent rate.

According to the report, the purpose of the payroll tax holiday was “to get money quickly into the hands of workers so they could spend it to help the nation out of the Great Recession. This purpose has nothing to di with financing Social Security. The legislation was expressly designed to avoid harming Social Security’s finances by requiring that the lost revenues from payroll taxes be made up from general revenues.”

For the rest of the year, Social Security has four dedicated sources of income, contributions from workers and employers, dedicated reimbursement funds from the federal government as a dollar-for-dollar replacement for the revenue lost because of the temporary reduction in payroll taxes, income taxes on benefits that some beneficiaries pay, and interest on the reserves held by Social Security’s trust funds.

The authors of the report believe a strategy needs to be devised to strengthen Social Security for the long run, once the holiday ends, and that can attract broad public support.

“If the economic recovery continues, the case can be made that the payroll tax holiday will have served its purpose,” the report said. “That could lay the groundwork for an exit strategy that addresses the immediate need to restore Social Security’s contribution rate to 6.2 percent for workers, matching the rate paid by employers. One such strategy would gradually restore the rate to 6.2 percent over several years to smooth the transition period and avoid a sudden impact on the still-fragile economy.”


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