Experts Offer ‘Exit Strategy’ for Social Security Payroll Tax Holiday

WASHINGTON, DC – The contributions that workers pay for Social Security have been temporarily reduced under legislation designed to get money quickly into the hands of workers so they could spend it to help the nation out of the Great Recession. This “payroll tax holiday” is scheduled to end on December 31, and a new fact sheet from the National Academy of Social Insurance describes an ‘exit strategy’ that could attract broad public support and help strengthen Social Security for the long term.

The exit strategy would gradually restore the workers’ contribution rate to 6.2% of earnings over several years, in order to smooth the transition from 4.2% (the reduced “holiday” rate) and avoid a sudden impact on the still-fragile economy. One option would then be to gradually raise the rate from 6.2% to about 7.0% for workers and employers alike, to address Social Security’s projected long-term revenue shortfall. In combination with other changes, such as lifting the cap on earnings taxable for Social Security (now set at $110,100), a very gradual increase in contribution rates could keep the program in balance throughout the retirement of the baby boomers and beyond.

“Given the forthcoming annual reports of the Social Security and Medicare trustees and our ongoing national conversation about strengthening these vital programs, it’s important to consider ways to end the payroll tax holiday that can attract broad public support,” said Virginia Reno, Vice President of Income Security Policy at the Academy and a co-author of the fact sheet. “This fact sheet describes an affordable strategy to help keep Social Security solvent and strong for future generations.”

The fact sheet notes that Social Security now has four dedicated sources of income: contributions from workers and employers; dedicated reimbursement funds from general revenues; income taxes on benefits that some beneficiaries pay; and interest on the reserves held in the trust funds. The reimbursement funds ensure that revenue not collected during the temporary tax reduction is being made up dollar-for-dollar, so that Social Security’s trust funds are unaffected by the payroll tax holiday.