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.


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.



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