Social Security Tax Deal for 2012 Explained

by Darwin on December 25, 2011

Social Security Tax changes for 2012 were recently enacted but will likely change again later in the year since the latest deal only carries over for the first two months of 2012 and will likely need to be extended yet again.  Aside from extending the existing payroll tax cut by 2% (payroll tax reduced from 6.2% to 4.2% up to the FICA limit) that we saw in 2011, there are several other provisions that were agreed to as part of the deal.

Payroll Tax Holiday Details:

 

  • Payroll Tax Holiday extended to February 29 and will revert back to 6.2% up to the 2012 FICA limit ($110,100 in 2012) unless extended again before that time.  Now that this payroll tax break has been in place for over a year and will likely be extended throughout 2012 and beyond again, each time a lapse is contemplated, pundits and politicians alike refer to a lapse as a “tax hike”, even though all workers and employers are rightfully supposed to be paying the full 6.2% in to fund Social Security.
  • Medicare Rates for Physicians – Extends the current payment rates for Medicare physicians, which was set to drop by 27.4 % starting Jan. 1,
  • Unemployment – Further extends up to 99 weeks of unemployment insurance for jobless workers that did not already reach the 99 weeks previously.  Each major deal Congress has passed of late had some component of further increases in unemployment insurance back up to 99 weeks.
  • Keystone XL pipeline – The Obama administration must rule on the project earlier in 2012 rather than delaying until 2013 (post-election). This was pushed by Republicans as well since it could be a job creator and help with energy reliance in the US, but would also invite concerns from environmentalists.
  • Cost – $33 Billion was the total cost of this Bill.
  • Payment – Unlike some prior versions of stimulus, tax breaks and bailouts, this bill will actually be paid for by increases in fees charged to mortgage lenders by Fannie Mae and Freddie Mac which some argue will complicate the lending transactions.  It is estimated that the additional fees will cover the cost of the bill over 10 years and will cost a homeowner with a $200K mortgage about $15 per month.

Analysis

Based on the various bailouts, stimulus packages and structural damage to the economy, it is evident Congress will find a way to extend this again further through 2012.  Then, with an election year looming, politicians will of course look to extend it even further to curry favor with voters for the year-end election cycle.  So, I envision this payroll tax holiday being extended over and over again, possibly even lowering it further to a 3.1% rate which was actually proposed this time around but rebuffed.  Alas, to do otherwise would be to “raise taxes on the backs of hard-working Americans” or whatever rhetoric you’d like to attach to it.  It basically just equates to a shell game.  After all, you’re doling out more money now in exchange for other fees and taxes elsewhere in the economy OR upon future generations.  This will just make future crises, recessions or depressions much harder to react to since there will be fewer tools available when interest rates are much higher to fund deficit stimulus measures.  While the notion of the payroll tax holiday is sound in that it is artificially boosting GDP temporarily, it does reek of partisan politics, currying favor with voters in pending elections and is not a sustainable solution to what really ails the country.

 

 

{ 10 comments… read them below or add one }

slug | sunkcostsareirrelevant.com December 25, 2011 at 4:56 pm

It seems like a reasonable thing to do would be to reduce the payroll tax t to 3.1% but also to remove the cap so workers earning more than $110,100 continue to pay. That would more than offset the reduction. This would basically tax everyone’s income equally. Right now anyone earning more than the $110,100 is actually taxed at a lower overall rate on their salary since some portion of it is untaxed after they reach the cap. Once averaged out those higher income earners pay a lower rate than those whose income does not exceed $110,100. This is probably a far too rational suggestion though…

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Darwin December 27, 2011 at 3:52 pm

The thing is, the cap is there since it’s funding Social Security for workers based on their earnings but SS payments in the future are capped. So, for instance, someone with an annual income in the millions still only receives the same SS benefit as someone who made $110K per year. So, if you propose taxing people past the cap, the program no longer has any relevance or bearing to the current program, it just becomes another federal income tax basically (another vehicle for redistribution of wealth, of which, many already exist in our tax code).

Personally, I’d much rather be able to just opt out of Social Security altogether OR invest my portion as I see fit in a privatized account.

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slug | sunkcostsareirrelevant.com December 27, 2011 at 8:46 pm

I figured something like SS payment caps were in play with this as well which negates the utility of my plan unless those too are removed.

I would also be fine with your suggestion of opting out altogether. Let those who want to play in the pool do so and those of us who wish to go it on our own do that. Much easier to max my 401k and 2 Roth’s that way for sure.

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JT December 27, 2011 at 12:05 pm

Republicans were for it. Then against it. Democrats were against it, then they were for it.

All people need to know is that Congress plays with your pocketbook as if it were a cog in a wheel, a pawn in a game of chess. Congress has no respect for your money beyond how it can improve its re-election prospects.

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Darwin December 27, 2011 at 3:55 pm

These deals are so easy to project months in advance, with much drama leading up to the last minute (i.e. the debt ceiling increase, multiple stimulus packages, etc). Each and every one is the same:
- Someone floats an idea to piss away free money to appeal to voters.
- Each side hems and haws over the details, gets in a few soundbytes, and gets their pet projects (usually completely unrelated to said deal) to get it passed.
The whole time, we all know it will pass anyway, then they pat themselves on the back for “bi-partisanship” and working together. All on who’s dime? The public.
Just saw Obama already has to go back to Congress for another increase in debt ceiling in excess of $1 Trillion. Arrrhhh!!

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slug | sunkcostsareirrelevant.com December 27, 2011 at 8:50 pm

Too bad the least partisan guy out there is totally unelectable….Ron Paul. Not that I haven’t voted for him in the past.

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Moneycone December 27, 2011 at 6:49 pm

Doesn’t every move reek of partisan politics? No wonder congress approval is at 9%. Though I do wonder who are these 9%?

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Maggie@SquarePennies December 28, 2011 at 4:08 am

You made me laugh at that one, MC! The elusive 9%. Maybe they are all relatives of Congress critters. It truly is a shell game. Darwin.

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Yogendra Rawat December 28, 2011 at 1:30 am

The most sane and wise man in your country speaks so softly that you need a high power audio amplifier to make his voice heard. He predicted what was coming , when he asked the question , “What is a Dollar? How much it is really worth?” Now he is past his prime, an old man, who has less charisma than Woody Allen.

And what do you say to the statement of one of the biggest investor of all time Warren Buffet. His wisdom, “I don’t see any point in buying gold and then putting 100 men to guard the wealth.”

We do not have much cash, but India has more Gold than any other country. If we can not become rich we wouldn’t go poor either.

Do some thing…

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Jeremy G. Preston January 6, 2012 at 11:30 pm

I don’t many know what to do about Congress. No one really can tell who to elect with all the crap our politicians fill the peoples heads with day in and day out. I really think we should be back at 6.2%. I also think there should be much stronger limitations to qualifying for unemployment benefits.

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