Your withholding may need adjusting but not your eyesight. Yes, your first paycheck of the year is a little smaller than usual. It's not an optics issue.
For someone making $50,000 a year, who gets paid every other week, it's probably about $38.50 lighter. Over the course of the year, that person will get about $1,000 less in take-home pay. For a family with an income of $100,000, the loss of $2,000 in income will be a hit.
But it should come as no surprise.
It's a result of the fact that, as part of the agreement to avert the "fiscal cliff," Congress ensured that 98 percent of Americans would not see an income tax increase. But lawmakers <CF102>did <CF101>allow a temporary cut in payroll taxes for Social Security and Medicare to expire.
It's not a tax increase. It's an expired tax break.
We know that doesn't make it any easier to swallow, but it's one part of the fiscal cliff with which we have no quibble. Although President Barack Obama had pushed for an extension of the payroll tax cut for another year, it was time to bring this to an end.
The break came in 2011 and 2012 when the Social Security payroll tax was dropped from 6.2 percent to 4.2 percent as means of helping workers get through the downturn in the economy.
In retrospect, a tax credit would have been a better tool, which is what Obama had been pushing — the Making Work Pay tax credit. But Republicans in Congress balked, and lawmakers came to agreement on a temporary payroll tax cut instead.
The cut ensured Americans got a little more money in their pockets and pumped more money into an ailing economy. The nation's unemployment rate at the time stood at 9.8 percent.
Meanwhile, Medicare taxes have gone back up as well, from 1.45 percent to 2.35 percent for singles making in excess of $200,000 and for couples filing joint returns who are making more than $250,000.
Allowing these taxes to revert to where they were will help shore up the finances of the nation's most critical entitlement programs — Social Security and Medicare. And it comes as an important time in our national debate about these programs. Social Security is projected to run out of money in 2035. Meanwhile, the Medicare trust fund is projected to be exhausted by 2024. We recognize that all of this won't make it any easier for the 77 percent of U.S. households that will be affected by this change.
The loss of income will probably wipe out that pay increase workers received last year, if they received one at all. According to the Bureau of Labor Statistics, wages have grown only about 2 percent a year on average since 2009, a rate that is barely keeping up with inflation.
Meanwhile, economists are projecting that the end of the payroll tax cut will slow the nation's recovery — but it won't stop it.
The fact that the nation is at a point where it can work on long-term problems — such as shoring up Social Security — rather than addressing near-term crises is, in itself, welcome news, even as a lighter paycheck isn't.