About that Social Security tax reduction…

About that Social Security tax reduction…

Several people have asked me if the reduction in Social Security taxes in 2011 will impact their actual benefit amount.

In short, the answer is “no”.  At least, not directly.

What’s actually happening is that for the first time ever funds in the government’s GENERAL account are being used to pay into the Social Security trust fund.  And we all know that there are no excess funds in the GENERAL account, so in essence we’re borrowing to pay to add to the Social Security trust fund to the tune of 2% of earned income (up to the maximum for each person contributing) in 2011.  So, the funding level is the same as it would have been without the tax cut, but the funds come from borrowing from the GENERAL fund rather than having you pay in the full 6.2% of salary that you’d normally pay.

This is for the year 2011 only.

As long as benefits remain at current levels, there will be no impact on your benefits due to the 2% tax “reduction” in 2011.  But as we all know, the GENERAL fund gets its revenue from… oh, yes, taxes.  At some point, taxes will need to be raised to pay for this 2011 reduction.

How does this impact your planning?

Not at all, immediately.  However, we have been assuming for the past year that taxes will increase to the year 2000 levels as soon as the current tax cuts expire.  We have also assumed that Social Security levels will increase at levels less than the rate of inflation to reflect that there may be future reductions in Social Security payments.  And for younger (under age 50) clients, we assume that benefits are reduced significantly from today’s levels.  And so, for many reasons (not just this year’s 2% Social Security tax reduction), we’re cautious about the future impact of government income and spending on your retirement planning.