Social Security: Temporary Payroll Tax Reduction

Social Security:

Temporary Payroll Tax Reduction

(name redacted)

Specialist in Income Security

May 7, 2012

Congressional Research Service

7-....

www.crs.gov

R41648

CRS Report for Congress

Prepared for Members and Committees of Congress

Social Security: Temporary Payroll Tax Reduction

Summary

In December 2010, Congress approved a temporary 2 percentage point reduction in the Social

Security payroll tax rate for employees and the self-employed in 2011 as part of the Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The

Social Security payroll tax rate in 2011 was 4.2% for employees and 10.4% for self-employed

workers. P.L. 111-312 made no changes to the Social Security payroll tax rate for employers

(6.2%) or to the amount of wages and net self-employment income subject to the Social Security

payroll tax ($106,800 in 2011). It provided general revenue transfers to the Social Security trust

funds to make up for the loss of payroll tax revenues. A worker’s future benefits are not affected.

The temporary reduction in the payroll tax for employees and the self-employed in 2011 was

intended to provide an economic stimulus by increasing workers’ take-home pay. For example,

the annual Social Security withholding for a worker earning the average wage in 2011 (an

estimated $44,687) was lower by about $894. The annual Social Security withholding for a

worker earning the maximum taxable wage ($106,800 in 2011) was lower by $2,136.

On December 23, 2011, a measure to extend the payroll tax reduction for workers for two months

(through February 2012) was passed by the House and the Senate and signed into law by

President Obama (H.R. 3765, P.L. 112-78). On February 17, 2012, the House and the Senate

agreed to the conference report on H.R. 3630, which further extends the payroll tax reduction for

workers through the end of calendar year 2012. H.R. 3630 was signed into law by President

Obama on February 22, 2012 (P.L. 112-96). The Social Security payroll tax for workers in effect

through December 2012 is 4.2% (rather than 6.2%). In March 2012, the Congressional Budget

Office estimated that the transfers from the general fund to the Social Security trust funds

resulting from the 2 percentage point reduction in the Social Security payroll tax for workers in

calendar years 2011 and 2012 will total $224 billion in FY2011-FY2013.

The temporary reduction in the Social Security payroll tax for employees and the self-employed

has drawn mixed reactions from policymakers. Some observers express concern about the

potential impact of the payroll tax reduction on Social Security’s long-term finances, despite the

general revenue transfers to protect the trust funds from a loss of payroll tax revenues. These

observers point out that, although the payroll tax reduction is temporary, the possibility remains

that Congress could continue to extend the payroll tax reduction or make the payroll tax reduction

permanent in response to political or other pressures. In addition, they maintain that the general

revenue transfers to the Social Security trust funds introduce an element of general revenue

financing to the Social Security program, signaling a departure from the self-financing

mechanism that has been in place since the program’s enactment in the 1930s that could

jeopardize the future of the program.

Others support the payroll tax reduction on the basis that it will stimulate economic recovery and

create jobs at a time when the United States continues to experience high rates of unemployment.

They maintain that the immediate increase in take-home pay will spur additional consumer

spending, increasing the demand for products and services, which in turn will increase production

and employment. Supporters point to the payroll tax exemption for employers in 2010 for hiring

certain unemployed workers as a precedent. They also point out that temporarily reducing Social

Security payroll taxes is a policy option that has been advanced in various forms by recent deficit

reduction commissions, among others, as an effective way to stimulate economic growth and job

creation consistent with long-term fiscal discipline.

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Social Security: Temporary Payroll Tax Reduction

Contents

Introduction...................................................................................................................................... 1

How the Social Security Program Is Financed ................................................................................ 2

Temporary Payroll Tax Reduction for Workers in 2011............................................................ 4

Senate Democratic Proposal to Extend and Expand the Payroll Tax Reduction in 2012

(S. 1917) ................................................................................................................................. 5

Senate Republican Proposal to Extend the Payroll Tax Reduction in 2012 (S. 1931) .............. 5

Revised Senate Democratic Proposal to Extend and Increase the Payroll Tax

Reduction for Workers in 2012 (S. 1944)............................................................................... 6

House Republican Proposal to Extend the Social Security Payroll Tax Reduction for

Workers in 2012 (H.R. 3630) ................................................................................................. 6

Senate Proposal to Extend for Two Months the Social Security Payroll Tax Reduction

for Workers (H.R. 3630, As Amended) .................................................................................. 7

House and Senate Agreement on a Two-Month Extension of the Payroll Tax

Reduction for Workers (H.R. 3765, P.L. 112-78) ................................................................... 7

House Republican Proposal to Extend the Payroll Tax Reduction for Workers

Through 2012 (H.R. 4013) ..................................................................................................... 7

Conference Agreement on H.R. 3630 (P.L. 112-96).................................................................. 8

Social Security Policy Considerations............................................................................................. 9

Views Among Opponents .......................................................................................................... 9

Views Among Supporters ........................................................................................................ 10

Contacts

Author Contact Information........................................................................................................... 12

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Social Security: Temporary Payroll Tax Reduction

Introduction

Social Security is a self-financed program that provides benefits to retired or disabled workers

and their family members and to the family members of deceased workers. Social Security is

financed by payroll taxes paid by covered workers and their employers. Employees and

employers each pay 6.2% of covered earnings up to an annual limit; self-employed individuals

pay 12.4% of net self-employment income up to an annual limit.1 Social Security is also credited

with tax revenues from the federal income taxes paid by some beneficiaries on a portion of their

benefits. In addition, Social Security receives interest income from Social Security trust fund

investments. Social Security income and outgo are accounted for in two separate trust funds

authorized under Title II of the Social Security Act: the Federal Old-Age and Survivors Insurance

(OASI) trust fund and the Federal Disability Insurance (DI) trust fund.2

In March 2010, Congress approved a temporary payroll tax exemption for employers as part of

the Hiring Incentives to Restore Employment Act (HIRE Act; P.L. 111-147).3 In 2010, employers

were exempt from the employer’s share of the payroll tax (6.2%) if they hired an individual who

had not been employed for more than 40 hours during the preceding 60-day period. The

employee’s share of the payroll tax was not affected. The payroll tax exemption for employers

expired on December 31, 2010. The law provided general revenue transfers to the Social Security

trust funds in amounts needed to protect the trust funds from a loss of payroll tax revenues due to

the temporary exemption.

In December 2010, Congress approved a temporary 2 percentage point reduction in the Social

Security payroll tax rate for employees and the self-employed in 2011 as part of the Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).4 The

employer’s share of the payroll tax was not affected. The law provided general revenue transfers

to the Social Security trust funds in amounts needed to protect the trust funds from a loss of

payroll tax revenues.

In late 2011, the House and Senate considered several bills to extend and expand the payroll tax

reduction in 2012. On November 28, 2011, Senator Harry Reid announced that the Senate would

take up legislation to extend and expand the payroll tax reduction in 2012 (S. 1917). On

November 30, 2011, Senate Republicans offered an alternative proposal that would extend the

payroll tax reduction for employees and the self-employed in 2012 (S. 1931). On December 1,

2011, both measures failed in the Senate on procedural votes. On December 5, 2011, Senate

Democrats introduced a revised proposal to extend and increase the payroll tax reduction for

workers in 2012 (S. 1944). On December 8, 2011, S. 1944 failed in the Senate on a procedural

vote, and S. 1931 failed in the Senate a second time on a procedural vote. On December 9, 2011,

House Republicans introduced a broad measure that includes a provision to extend the payroll tax

reduction for workers for one year (H.R. 3630). On December 13, 2011, H.R. 3630 was passed by

1

Congress has increased the Social Security payroll tax rate many times over the program’s history. The payroll tax

rate under current law (12.4%) was established by P.L. 98-21 (the Social Security Amendments of 1983). P.L. 98-21

increased the payroll tax rate gradually from 11.4% in 1984 to 12.4% in 1990.

2

In this report, the OASI and DI trust funds are referred to on a combined basis as the Social Security trust funds.

3

See Title I, §101 (Payroll Tax Forgiveness for Hiring Unemployed Workers) of P.L. 111-147, available at

http://www.gpo.gov/fdsys/pkg/PLAW-111publ147/pdf/PLAW-111publ147.pdf.

4

The temporary reduction in the Social Security payroll tax is also referred to as a “payroll tax holiday.”

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the House by a vote of 234-193. On December 17, 2011, the Senate passed H.R. 3630, as

amended, by a vote of 89-10. H.R. 3630, as amended, would extend the payroll tax reduction for

workers for two months through the end of February 2012. On December 20, 2011, the House

voted 229-193 to disagree with the Senate-passed version of H.R. 3630 and request a conference

with the Senate to resolve differences between the House- and Senate-passed versions of H.R.

3630 regarding an extension of the payroll tax reduction for workers, among other provisions. On

December 23, 2011, House Republicans introduced a measure (H.R. 3765) to extend the payroll

tax reduction for workers for two months (through February 2012). The same day, H.R. 3765 was

passed by the House and the Senate and signed into law by President Obama (P.L. 112-78).

On February 13, 2012, House Republicans introduced a stand-alone measure (H.R. 4013) that

would extend the current payroll tax reduction for workers through 2012. On February 16, 2012,

House and Senate conferees agreed to file a conference report on H.R. 3630 (H.Rept. 112-399),

which includes an extension of the current payroll tax reduction through 2012, among other

provisions. On February 17, 2012, the conference report on H.R. 3630 was agreed to in the House

by a vote of 293-132 and in the Senate by a vote of 60-36. President Obama signed the measure

into law on February 22, 2012 (P.L. 112-96). The Social Security payroll tax for workers in effect

through December 2012 is 4.2% (rather than 6.2%).

This report discusses Social Security policy considerations related to temporary payroll tax

reductions. For a discussion of economic stimulus considerations related to temporary payroll tax

reductions, see CRS Report R42103, Extending the Temporary Payroll Tax Reduction: A Brief

Description and Economic Analysis, by (name redacted) and (name redacted).

How the Social Security Program Is Financed

The Social Security program is financed primarily by revenues from Federal Insurance

Contributions Act (FICA) taxes and Self Employment Contributions Act (SECA) taxes. FICA

taxes are paid by both employers and employees, but it is employers who remit the taxes to the

U.S. Treasury. Employers remit FICA taxes on a regular basis throughout the year (for example,

weekly, monthly, quarterly, or annually), depending on the employer’s level of total employment

taxes (Social Security, Medicare, and federal individual income tax withholding).

The FICA tax rate of 7.65% each for employers and employees has two components: 6.2% for

Social Security and 1.45% for Medicare Hospital Insurance (HI). Under current law, employers

and employees each pay 6.2% of covered wages, up to an annual limit, in Social Security payroll

taxes. The SECA tax rate is 15.3% for self-employed individuals, with 12.4% for Social Security

and 2.9% for Medicare HI. Self-employed individuals pay 12.4% of net self-employment income,

up to an annual limit, in Social Security payroll taxes.5 One-half of the SECA taxes are allowed as

a deduction for federal income tax purposes.6 SECA taxes are normally paid once a year as part of

filing an annual individual income tax return.

5

The annual limit on wages and net self-employment income subject to the Social Security payroll tax (the taxable

wage base) is adjusted annually based on average wage growth, if a Social Security cost-of-living adjustment (COLA)

is payable. Because no COLA was payable in 2010 and 2011, the taxable wage base remained $106,800 from 2009 to

2011. In 2012, the taxable wage base is $110,100. The Medicare HI component of the FICA/SECA tax is levied on

total wages.

6

Self-employed individuals are required to pay Social Security payroll taxes if they have annual net earnings of $400

(continued...)

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In addition to Social Security payroll taxes, the Social Security program has two other sources of

income. Certain Social Security beneficiaries must include a portion of Social Security benefits in

taxable income for the federal income tax, and the Social Security program receives part of those

tax revenues.7 In addition, the Social Security program receives interest from the U.S. Treasury

on its investments in special U.S. government obligations.

As the Managing Trustee of the Social Security trust funds, the Secretary of the Treasury is

required by law to invest Social Security revenues in interest-bearing federal government

securities (special issues) held by the trust funds.8 The revenues exchanged for the federal

government securities are deposited into the general fund of the U.S. Treasury and are

indistinguishable from revenues in the general fund that come from other sources. Because the

assets held by the trust funds are federal government securities, the trust fund balance represents

the amount of money owed to the Social Security trust funds by the general fund of the U.S.

Treasury. Funds needed to pay Social Security benefits and administrative expenses come from

the redemption or sale of federal government securities held by the trust funds.9

Based on the program’s current financing and benefit structure, the Social Security Board of

Trustees projects that Social Security expenditures will exceed tax revenues (or non-interest

income) each year from 2012 to 2086 (i.e., the program will operate with annual cash-flow

deficits). When interest income to the trust funds is taken into account, the trustees project that

the Social Security trust funds will have a total surplus each year from 2012 to 2020 (i.e., total

income—tax revenues plus interest income—will exceed Social Security expenditures). As a

result, the balance in the Social Security trust funds (the amount of assets held by the trust funds

in the form of federal government securities) is projected to increase each year from 2012 to

2020. Beginning in 2021, however, trust fund reserves will begin to be drawn down to help pay

benefits and administrative expenses.

Over the next 75 years (2012 to 2086), the Social Security trustees project that program costs will

exceed income on average by an amount equal to 2.67% of taxable payroll (stated another way,

on average, costs are projected to exceed income by approximately 19%). The trustees also

project that the assets held by the trust funds will be exhausted in 2033. Social Security benefits

scheduled under current law can be paid in full until trust fund assets are exhausted (2033). After

the trust fund reserves are exhausted, incoming Social Security receipts are projected to be

sufficient to pay 75% of benefits scheduled under current law in 2033 and 73% of scheduled

benefits in 2086.10

(...continued)

or more. Only 92.35% of net self-employment income (up to the annual limit) is taxable.

7

The tax revenues associated with including Social Security benefits in federal taxable income go to the Social

Security trust funds and the Medicare HI trust fund. See CRS Report RL32552, Social Security: Calculation and

History of Taxing Benefits, by (name redacted).

8

Social Security Act, Title II, §201(d).

9

Social Security Administration, Trust Fund FAQs, http://www.socialsecurity.gov/OACT/ProgData/fundFAQ.html.

10

Projections are based on the intermediate assumptions of The 2012 Annual Report of the Board of Trustees of the

Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, April 23, 2012, available at

http://www.socialsecurity.gov/OACT/TR/2012/. For more information on the trust fund projections, see CRS Report

RL33028, Social Security: The Trust Fund, by (name redacted) and (name redacted).

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Temporary Payroll Tax Reduction for Workers in 2011

As noted above, the Social Security payroll tax rate is 6.2% for employers and employees (each)

and 12.4% for the self-employed. On December 17, 2010, President Obama signed into law the

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111312). Title VI of the law provided a temporary 2 percentage point reduction in the payroll tax rate

for employees and the self-employed in 2011.11 The Social Security payroll tax rate in 2011 was

4.2% for employees and 10.4% for the self-employed.12 P.L. 111-312 made no changes to the

Social Security payroll tax rate for employers (6.2%) or to the amount of annual wages and net

self-employment income subject to the Social Security payroll tax ($106,800 in 2011). The

reduction in the Social Security payroll tax does not affect the amount of an individual’s future

Social Security benefit.13

The temporary reduction in the payroll tax for employees and the self-employed in 2011 was

intended to provide an economic stimulus by increasing workers’ take-home pay. For example,

the annual Social Security withholding for a worker earning the average wage in 2011 (an

estimated $44,687)14 was lower by about $894. The annual Social Security withholding for a

worker earning the maximum taxable wage ($106,800 in 2011) was lower by $2,136.

To protect the Social Security trust funds from a loss of payroll tax revenues resulting from the

temporary reduction in the payroll tax rate for employees and the self-employed, P.L. 111-312

appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax

revenues to the Treasury. The law specified that these appropriated amounts “shall be transferred

from the general fund at such times and in such manner as to replicate to the extent possible the

transfers which would have occurred to such Trust Fund had such amendments not been

enacted.”15 In August 2011, the Congressional Budget Office (CBO) estimated that general

revenue transfers to the Social Security trust funds as a result of the temporary payroll tax

reduction in 2011 would total $111 billion.16

11

The temporary reduction in the payroll tax rate also applied to railroad workers. For more information, see CRS

Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability, Unemployment, and Sickness Benefits,

by (name redacted).

12

The temporary reduction in the payroll tax rate did not affect the amount of payroll taxes that self-employed

individuals may deduct for federal income tax purposes.

13

An individual’s Social Security benefit is based on his or her average career earnings subject to the Social Security

payroll tax, indexed to account for changes in average wages over time. Because P.L. 111-312 did not affect the

amount of wages and net self-employment income subject to the Social Security payroll tax, it does not affect the

amount of an individual’s future Social Security benefit.

14

Social Security Administration, 2011 Social Security/SSI/Medicare Information, December 22, 2010, available at

http://www.socialsecurity.gov/legislation/2011factsheet.pdf.

15

The text of P.L. 111-312 is available at http://www.gpo.gov/fdsys/pkg/PLAW-111publ312/pdf/PLAW111publ312.pdf. See Title VI, Temporary Employee Payroll Tax Cut.

16

Congressional Budget Office, Combined OASDI Trust Funds, August 2011 Baseline, available at

http://www.cbo.gov/budget/factsheets/2011c/OASDITrustFund.pdf. In January 2012, CBO estimated that the general

revenue transfers to the Social Security trust funds, including those associated with the two-month extension of the

payroll tax reduction in 2012 under P.L. 112-78, would total $130 billion in FY2011-FY2013. See Combined OASDI

Trust Funds, January 2012 Baseline, available at http://www.cbo.gov/ftpdocs/127xx/doc12725/OASDI.pdf.

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Senate Democratic Proposal to Extend and Expand the Payroll Tax

Reduction in 2012 (S. 1917)

On November 28, 2011, Senator Harry Reid announced that the Senate would take up legislation

to extend and expand the Social Security payroll tax reduction in 2012 (S. 1917, the Middle Class

Tax Cut Act of 2011, introduced by Senator Robert Casey). S. 1917 would provide a 3.1

percentage point reduction in the payroll tax for workers in 2012 (the worker’s share of the

payroll tax would be reduced from 6.2% to 3.1%). In addition, the measure would provide a 3.1

percentage point reduction in the payroll tax for employers (from 6.2% to 3.1%) on the first $5

million of taxable payroll for 2012.

The measure also would eliminate the Social Security payroll tax for employers on the first

$12.5 million of increased wages paid by the employer for the fourth quarter of 2011, and on the

first $50 million of increased wages paid by the employer for 2012 (i.e., increased wages

attributed to new hires or higher wages paid to current workers).

S. 1917 would provide general revenue transfers to the Social Security trust funds to make up for

the loss of payroll tax revenues.

A preliminary estimate by the Joint Committee on Taxation shows that the payroll tax provisions

in S. 1917 would cost $265 billion.17 To offset the cost of the measure, S. 1917 would impose a

3.25% surtax on modified adjusted gross income in excess of $1 million for single filers and

married couples filing jointly, effective for taxable years beginning after December 31, 2012.18

On December 1, 2011, S. 1917 failed in the Senate on a 51-49 procedural vote.

Senate Republican Proposal to Extend the Payroll Tax Reduction

in 2012 (S. 1931)

On November 30, 2011, Senator Dean Heller introduced legislation (S. 1931, the Temporary Tax

Holiday and Government Reduction Act) to extend the temporary 2 percentage point reduction in

the Social Security payroll tax for workers, set to expire at the end of calendar year 2011, in 2012.

S. 1931, offered as an alternative to the Senate Democratic proposal, would not provide a payroll

tax reduction for employers. The measure would provide general revenue transfers to the Social

Security trust funds to make up for the loss of payroll tax revenues.

Among other provisions, S. 1931 would offset the cost by extending the current federal employee

pay freeze for an additional three years and reducing the size of the federal workforce. The

measure would effectively eliminate unemployment compensation for certain individuals based

on income; make certain individuals ineligible for benefits under the Supplemental Nutrition

17

Joint Committee on Taxation, Estimated Budget Effects of “The Middle Class Tax Cut Act of 2011,” November 28,

2011.

18

A summary document released by the Democratic Policy and Communications Center on November 28, 2011, is

available at http://www.cq.com/pdf/govdoc-3988932.

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Assistance Program (formerly known as food stamps) based on income; and require certain

individuals, based on income, to pay higher Medicare premiums compared with current law.19

On December 1, 2011, S. 1931 failed in the Senate on a 20-78 procedural vote. S. 1931 failed in

the Senate a second time by a 22-76 procedural vote on December 8, 2011.

Revised Senate Democratic Proposal to Extend and Increase the

Payroll Tax Reduction for Workers in 2012 (S. 1944)

On December 5, 2011, Senator Robert Casey introduced a revised Senate Democratic proposal to

extend and increase the Social Security payroll tax reduction for workers in 2012 (S. 1944, the

Middle Class Tax Cut Act of 2011). Among other provisions, S. 1944 would provide a 3.1

percentage point reduction in the Social Security payroll tax for workers in 2012 (the worker’s

share of the payroll tax would be reduced from 6.2% to 3.1%). The measure would not provide a

payroll tax reduction for employers. S. 1944 would provide general revenue transfers to the

Social Security trust funds to make up for the loss of payroll tax revenues.

To offset the cost of the measure, S. 1944 would impose a temporary 1.9% surtax on modified

adjusted gross income in excess of $1 million for single filers and married couples filing jointly,

effective for taxable years beginning after 2012 and before 2022. In addition, the measure would

increase the fees that Fannie Mae and Freddie Mac charge mortgage lenders to guarantee

repayment of new mortgage loans. S. 1944 would effectively eliminate unemployment

compensation for certain individuals based on income and make certain individuals ineligible for

benefits under the Supplemental Nutrition Assistance Program (formerly known as food stamps)

based on income.20

On December 8, 2011, S. 1944 failed in the Senate on a 50-48 procedural vote.

House Republican Proposal to Extend the Social Security Payroll

Tax Reduction for Workers in 2012 (H.R. 3630)

On December 9, 2011, Representative Dave Camp introduced H.R. 3630, the Middle Class Tax

Relief and Job Creation Act of 2011. Among other provisions, the broad (369-page) measure

would extend for one year the 2 percentage point reduction in the Social Security payroll tax for

workers. The measure would not provide a payroll tax reduction for employers. H.R. 3630 would

provide general revenue transfers to the Social Security trust funds to make up for the loss of

payroll tax revenues.21

19

See the November 30, 2011, press release on Senator Dean Heller’s website at http://www.heller.senate.gov/public/

index.cfm/2011/11/heller-offers-bill-to-extend-temporary-payroll-tax-cut. In addition, see Congressional Budget

Office, Budgetary Effects for S. 1931, the Temporary Tax Holiday and Government Reduction Act, as introduced on

November 30, 2011, December 1, 2011, at http://cbo.gov/ftpdocs/125xx/doc12578/s1931.pdf.

20

See the December 5, 2011, press release on Senator Robert Casey’s website at http://www.casey.senate.gov/

newsroom/press/release/?id=bc7ab64b-e999-4d86-b980-cd555e4b56e0.

21

The Congressional Budget Office estimates that the general revenue transfers to the Social Security trust funds to

make up for the loss of payroll tax revenues would total $121.223 billion. See CBO’s Letter to the Honorable Dave

Camp, Table 2, Effects on Revenues and Direct Spending of H.R. 3630, the Middle Class Tax Relief and Job Creation

Act of 2011, as Introduced on December 9, 2011, at http://www.cbo.gov/ftpdocs/126xx/doc12609/hr3630.pdf.

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Among other provisions, H.R. 3630 would offset the cost of the bill by extending the current pay

freeze for federal employees and making changes to civilian federal pension benefits. The

measure would effectively eliminate unemployment compensation for certain individuals based

on income; make certain individuals ineligible for benefits under the Supplemental Nutrition

Assistance Program (formerly known as food stamps) based on income; and require certain

individuals, based on income, to pay higher Medicare premiums compared with current law.22

On December 13, 2011, H.R. 3630 was passed by the House by a vote of 234-193.

Senate Proposal to Extend for Two Months the Social Security

Payroll Tax Reduction for Workers (H.R. 3630, As Amended)

On December 17, 2011, the Senate passed H.R. 3630, with an amendment in the nature of a

substitute (S.Amdt. 1465), by a vote of 89-10. Among other provisions, the Senate-passed version

of H.R. 3630 (renamed the Temporary Payroll Tax Cut Continuation Act of 2011) would extend

the payroll tax reduction for workers for two months (i.e., for January and February 2012). Under

H.R. 3630, as amended, the reduced 4.2% payroll tax rate for workers would apply to the first

$18,350 of covered wages (an amount equal to two-twelfths of the 2012 taxable wage base of

$110,100).

On December 20, 2011, the House voted 229-193 to disagree with the Senate-passed version of

H.R. 3630 and request a conference with the Senate to resolve differences between the Houseand Senate-passed versions of H.R. 3630 regarding an extension of the payroll tax reduction for

workers.

House and Senate Agreement on a Two-Month Extension of the

Payroll Tax Reduction for Workers (H.R. 3765, P.L. 112-78)

On December 23, 2011, Representative Dave Camp introduced H.R. 3765, the Temporary Payroll

Tax Cut Continuation Act of 2011. Among other provisions, the measure extends the 2 percentage

point reduction in the Social Security payroll tax for workers for two months (i.e., through

February 29, 2012). The reduced payroll tax rate (4.2%) applies to the first $18,350 of covered

wages (an amount equal to two-twelfths of the 2012 taxable wage base of $110,100).

On December 23, 2011, H.R. 3765 was passed by the House and the Senate and signed into law

by President Obama (P.L. 112-78).

House Republican Proposal to Extend the Payroll Tax Reduction for

Workers Through 2012 (H.R. 4013)

On February 13, 2012, Representative Wally Herger introduced H.R. 4013, the Temporary Payroll

Tax Cut Continuation Act of 2012. The measure would extend the 2 percentage point reduction in

the Social Security payroll tax for workers through the end of calendar year 2012 (i.e., from

22

See the December 9, 2011, press release on Representative Dave Camp’s website at http://camp.house.gov/News/

DocumentPrint.aspx?DocumentID=271961.

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March through December 2012).23 The measure would provide general revenue transfers to the

Social Security trust funds to make up for the loss of payroll tax revenues. H.R. 4013 does not

include provisions to offset the cost of the measure.

Conference Agreement on H.R. 3630 (P.L. 112-96)

On February 16, 2012, the conference committee appointed to resolve differences between the

House- and Senate-passed versions of H.R. 3630 (discussed above) agreed to file a conference

report on the measure (H.Rept. 112-399). On February 17, 2012, the House agreed to the

conference report on H.R. 3630 by a vote of 293-132. The same day, the Senate agreed to the

conference report on H.R. 3630 by a vote of 60-36. President Obama signed the measure into law

on February 22, 2012 (P.L. 112-96).

Among other provisions, P.L. 112-96 extends the current 2 percentage point reduction in the

Social Security payroll tax for workers (previously scheduled to expire at the end of February

2012) through the end of calendar year 2012.24 The Social Security payroll tax for workers in

effect through December 2012 is 4.2% (rather than 6.2%). It provides general revenue transfers to

the Social Security trust funds to make up for the loss of payroll tax revenues.25

The overall cost of P.L. 112-96 is partially offset by increasing the employee pension contribution

for federal employees entering service after December 31, 2012, among other provisions.26

For documents related to P.L. 112-96, the Middle Class Tax Relief and Job Creation Act of 2012,

see the following:

Conference Report on H.R. 3630 (H.Rept. 112-399), February 16, 2012, at

http://www.gpo.gov/fdsys/pkg/CRPT-112hrpt399/pdf/CRPT-112hrpt399.pdf

Congressional Budget Office, Letter to the Honorable Dave Camp, February 16, 2012, at

http://www.cbo.gov/ftpdocs/127xx/doc12764/hr3630.pdf

23

P.L. 112-78 extended the temporary payroll tax reduction for workers through February 2012.

Among the other provisions included in P.L. 112-96 are those dealing with unemployment compensation and

Medicare payments to physicians. For more information, see CRS Report R41662, Unemployment Insurance:

Legislative Issues in the 112th Congress, by (name redacted) and (name r edacted), and CRS Report R40907,

Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System, by (name redacted) and (name reda

cted).

25

In March 2012, the Congressional Budget Office estimated that transfers from the general fund to the Social Security

trust funds resulting from the 2 percentage point reduction in the Social Security payroll tax for workers in calendar

years 2011 and 2012 will total $224 billion in FY2011-FY2013. See Combined OASDI Trust Funds, March 2012

Baseline, available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43063_OldAgeSurvivorsDisabiityInsuranceTrustFunds.pdf.

26

For more information, see CRS Report 98-810, Federal Employees’ Retirement System: Benefits and Financing, by

(name redacted).

24

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Social Security: Temporary Payroll Tax Reduction

Social Security Policy Considerations

The temporary reduction in the payroll tax for employees and the self-employed has drawn mixed

reactions from policymakers. The following section presents key policy considerations raised by

opponents and supporters of the temporary payroll tax reduction.27

Views Among Opponents

Despite the general revenue transfers to protect the trust funds from a loss of payroll tax revenues,

some observers have expressed concern about the potential impact of the temporary reduction in

the payroll tax for employees and the self-employed on Social Security’s long-term finances.

These observers point out that, although the payroll tax reduction is temporary, the possibility

remains that Congress could continue to extend the payroll tax reduction or make the payroll tax

reduction permanent in response to political or other pressures without providing transfers from

general revenues. In addition, restoring the 2 percentage points of the employee’s share of the

payroll tax (from 4.2% to 6.2%) could be viewed by the public as a 50% increase in Social

Security payroll taxes.

Opponents maintain that the general revenue transfers to the Social Security trust funds introduce

an element of general revenue financing to the Social Security program, signaling a departure

from the self-financing mechanism that has been in place since the program’s enactment in the

1930s. They believe that, without a dedicated revenue source, the future of the program could be

in jeopardy if, like other federal programs, Social Security must rely on general revenues for part

of its funding. Moreover, they point out that using general revenues to partially fund benefits

breaks the traditional link between payroll tax contributions and benefits, weakening the

fundamental earned-right nature of the program which in turn could affect public support for the

program. Finally, some argue that using general revenues to partially fund Social Security

benefits is unfair because not all taxpayers participate in the Social Security system.28

Some observers believe that other policy options, such as an extension of the Making Work Pay

(MWP) refundable tax credit, would be more effective as an economic stimulus measure than a

temporary reduction in the employees’ share of the payroll tax.29 The MWP tax credit was

authorized by the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) and

expired on December 31, 2010. It provided workers with a federal income tax credit of 6.2% of

wages, up to a maximum credit of $400 ($800 for married couples filing jointly), in tax years

27

For information on administrative issues associated with the temporary reduction in the Social Security payroll tax in

2011, see Social Security Tax Holiday Has Payroll Managers Scrambling, Tax Notes, January 3, 2011, p. 26.

28

On a related point, the temporary payroll tax reduction has been criticized by some observers because it does not

benefit individuals who work in jobs that are not covered by Social Security (such as some state and local government

employees). For more information, see The National Committee to Preserve Social Security and Medicare (NCPSSM),

Reps. Doggett, Chu, DeFazio, Deutch, Holt, and the National Committee to Preserve Social Security and Medicare

Call Payroll Tax Holiday Bad Break for Families, December 15, 2010, available at http://www.ncpssm.org/news/

archive/opposing_payroll_tax_cut/. See also NCPSSM, Social Security Experts Detail Why Payroll Tax “Holiday” is

No Gift to Americans, December 10, 2010, available at http://www.ncpssm.org/news/archive/

payroll_tax_holiday_press_release/.

29

For more information, see Center for Budget and Policy Priorities (CBPP), Payroll Tax Holiday a Poor Stimulus

Idea, “Making Work Pay” Credit a Better-Targeted Alternative, January 26, 2009, available at http://www.cbpp.org/

cms/index.cfm?fa=view&id=2264.

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Social Security: Temporary Payroll Tax Reduction

2009 and 2010. The MWP tax credit was phased out for workers with incomes above $75,000

($150,000 for married couples filing jointly). It was implemented during the tax year by lowering

the amount of federal income taxes withheld from workers’ paychecks.30

Some observers favor the MWP tax credit over a reduction in the Social Security payroll tax

because it was available to all workers (not just those covered by Social Security).31 Moreover,

the MWP tax credit was more favorable to workers earning less than $20,000, compared to the

payroll tax reduction. For a worker earning $20,000, the value of the MWP tax credit and the

payroll tax reduction is the same ($400).32 At earnings levels above $20,000, the value of the

payroll tax reduction is relatively greater.33 At earnings levels below $20,000, the value of the

MWP tax credit is relatively greater.34

Because the refundable MWP tax credit was more generous to lower-wage workers compared to

the payroll tax reduction (which provides an increasingly larger dollar benefit for workers with

higher earnings), and lower-wage earners are believed to be more likely to spend the additional

take-home pay compared with middle- and higher-wage earners, the MWP tax credit is

considered by some to be a more effective economic stimulus measure. As a result, some

observers recommend adding a “hold harmless” provision for lower-wage workers so that these

workers would be no worse off under the payroll tax reduction compared with the MWP tax

credit.35

Views Among Supporters

Some observers support the temporary reduction in the Social Security payroll tax on the basis

that it will stimulate economic recovery and create jobs at a time when the United States

continues to experience high rates of unemployment. They maintain that the immediate increase

in take-home pay will spur additional consumer spending, increasing the demand for products and

services, which in turn will increase production and employment.

A temporary reduction in the Social Security payroll tax is not without precedent. In 2010,

Congress approved a temporary exemption from the payroll tax for employers who hired certain

unemployed persons, as part of the HIRE Act of 2010 (P.L. 111-147). Temporarily reducing

Social Security payroll taxes is a policy option that has been advanced in various forms by recent

deficit reduction commissions, among others, as an effective way to stimulate economic growth

and job creation consistent with long-term fiscal discipline.36

30

For information on the MWP tax credit, see CRS Report R40969, Withholding of Income Taxes and the Making

Work Pay Tax Credit, by (name redacted).

31

An estimated 6% of workers in paid employment or self-employment are not covered by Social Security. See Social

Security Administration, 2012 Social Security/SSI/Medicare Information, February 28, 2012, available at

http://www.socialsecurity.gov/legislation/2012factsheet.pdf.

32

MWP tax credit = $20,000 * 6.2% (up to $400) = $400; payroll tax reduction = $20,000 * 2% = $400.

33

MWP tax credit = $21,000 * 6.2% (up to $400) = $400; payroll tax reduction = $21,000 * 2% = $420.

34

MWP tax credit = $19,000 * 6.2% (up to $400) = $400; payroll tax reduction = $19,000 * 2% = $380.

35

For example, see Economic Policy Institute, Any payroll tax cut should be designed not to hurt lower-income

workers, December 15, 2010, available at http://www.epi.org/analysis_and_opinion/entry/

any_payroll_tax_cut_should_be_designed_not_to_hurt_lower-income_workers/.

36

For example, see CBO, Information on Reducing Payroll Taxes to Encourage Employment, Letter to the Honorable

Robert P. Casey Jr., February 3, 2010, available at http://www.cbo.gov/ftpdocs/110xx/doc11042/02-03(continued...)

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Social Security: Temporary Payroll Tax Reduction

In testimony before the Senate Budget Committee in September 2010 on the potential impact of

various fiscal policy options on the economy, CBO Director Douglas W. Elmendorf stated:

A temporary reduction in payroll taxes—especially in the share of taxes paid by

employers—would also have a significant positive short-term effect on the economy. This

approach would boost output and employment both by increasing demand for goods and

services and by providing an incentive for additional hiring.37

CBO estimated that reducing Social Security payroll taxes for employees would raise output

cumulatively over a five-year period by $0.30 to $0.90 per dollar of total budgetary cost. In

comparison, CBO estimated that reducing Social Security payroll taxes for employers would have

a somewhat larger effect, raising output by $0.40 to $1.20 per dollar of total budgetary cost.38

In November 2010, the Bipartisan Policy Center’s deficit reduction commission co-chaired by

former Senator Pete Domenici and Dr. Alice Rivlin recommended a one-year suspension of the

Social Security payroll tax for employers and employees. The commission recommended that

employers and employees be exempt from the 12.4% payroll tax in 2011, and that the Social

Security trust funds be reimbursed in full from general revenues. The commission stated that the

proposal would cost an estimated $650 billion and would create between 2.5 million and 7

million new jobs (based on CBO assumptions).39

In December 2010, the National Commission on Fiscal Responsibility and Reform established by

President Obama recommended a “temporary suspension of one side of the Social Security

payroll tax, financed by transfers from general revenue.” The commission stated that the proposal

would cost an estimated $50 billion to $100 billion in lost revenues, depending on the design, and

that CBO found it would result in “significant short-term economic growth and job creation.”40

(...continued)

CaseyLetter.pdf. See also CBO, Policies for Increasing Economic Growth and Employment in 2010 and 2011, January

2010, available at http://www.cbo.gov/ftpdocs/108xx/doc10803/01-14-Employment.pdf.

37

CBO, The Economic Outlook and Fiscal Policy Choices, Testimony by CBO Director Douglas W. Elmendorf before

the Senate Committee on the Budget, September 28, 2010, p. 3, available at http://www.cbo.gov/ftpdocs/118xx/

doc11874/09-28-EconomicOutlook_Testimony.pdf. (Hereinafter cited as CBO Testimony before the Senate Budget

Committee, September 28, 2010.)

38

CBO Testimony before the Senate Budget Committee, September 28, 2010, pp. 21-22. In this analysis, CBO noted

that the largest effect on the economy per dollar of budgetary cost would result from a temporary increase in aid to the

unemployed. P.L. 111-312, which provided the temporary payroll tax reduction for employees and the self-employed in

2011, also extended the temporary Emergency Unemployment Compensation (EUC08) program until December 31,

2011.

39

Bipartisan Policy Center, Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt, and

Creating a Simple, Pro-Growth Tax System, The Debt Reduction Task Force, Senator Pete Domenici and Dr. Alice

Rivlin, Co-Chairs, November 2010, pp. 10 and 16, available at http://bipartisanpolicy.org/sites/default/files/

FINAL%20DRTF%20REPORT%2011.16.10.pdf. For more information, see estimates of the OASDI financial effects

and benefit illustrations under the plan prepared by the Office of the Chief Actuary, Social Security Administration,

available at http://www.ssa.gov/OACT/solvency/index.html.

40

The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 1, 2010,

p. 43, available at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/

TheMomentofTruth12_1_2010.pdf. For more information, see estimates of the OASDI financial effects and benefit

illustrations under the plan prepared by the Office of the Chief Actuary, Social Security Administration, available at

http://www.ssa.gov/OACT/solvency/index.html.

Congressional Research Service

11

Social Security: Temporary Payroll Tax Reduction

Author Contact Information

(name redacted)

Specialist in Income Security

*redacted*@crs.loc.gov, 7-....

Congressional Research Service

12

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