Lower Social Security Withholding: What is the True Effect on You?

As you may possibly already be aware, the Federal government has lowered the Social Security tax temporarily for 2011. On the surface, this looks to be a fairly uncomplicated way for the American worker to bring home a bit more of that monthly paycheck, but what influence will this truly have on your household budget? To genuinely evaluate the scope of this cut, one must take into account that in addition to the Social Security tax being a withholding, it also decreases taxable income. If all other factors remain equal, this means that any reduction in Social Security tax translates into an increase in Federal and State income tax. This could severely or even completely negate any potential benefit to the taxpayer.

The cut amounts to a 2% lessening in the withholdings on wages up to $106,800 (the spot at which the Social Security tax caps out). For an employee earning $60,000 per year ($5000 per month) Social Security withholdings decrease $100 per month. However, Federal income tax must then be levied on this "increase" in taxable income, resulting in a savings of far less than the face-value 2%. In rare instances, employees who border on crossing up into the next tax bracket may find themselves paying significantly more in income tax as a result of this SS decrease. For the most part, the reduction may put a few additional dollars in your checking account every month but in all probability not enough for you to notice a major variation.

The reduction in the tax is not anticipated to hurt the fund's finances as it will be reimbursed the full amount from the Treasury. However, those in disagreement with the cut say that it is really just a fancy way for lawmakers to increase Federal income tax revenue without actually increasing taxes. In addition, a system that in the past has been self-funding and therefore has had zero impact on the nation's deficit can no longer make that claim. It should be noted that the employer's portion of the Social Security tax has not been lowered- an interesting caveat given the fact that small business owners would have almost certainly benefited most from the cut and yielded a smaller percentage increase in Federal tax money collected.

Another remarkable change with Social Security is that after May 1, 2011 paper checks will no longer be sent. Instead, recipients will have the option of either direct deposit or having their monthly dispursement awarded to them in the form of a preloaded debit Mastercard. This change is estimated to save the SSA approximately $120 Million annually and will potentially reduce matters such as check fraud and lost/stolen mail.

Regardless of your view on these adaptations, it is clear that retirement planning is a essential issue that needs to be addressed by all Americans long before they hit age 62. Active portfolio management and working with a trusted and experienced financial advisor will assist you to secure the future for both you and your family while avoiding unwarranted risk. Make the effort now to become educated and assume an active role in planning for your retirement by reviewing your current financial plan with a professional.


Learn more about active portfolio management and its benefits by contacting John Dubots, Temecula financial advisor, with Dubots Capital Management. Dubots has over two decades in the industry and will provide a free consultation to answer all of your portfolio management questions.