Nearly two years ago I warned people not to use the temporary 2% reduction in Social Security payroll tax for their daily expenses, but rather to increase savings, perhaps their 401(k) plan, by the same amount. That way when the 2% tax break went away the extra savings could be reduced with no impact on take home pay.

I doubt many people took my advice. Sadly these folks are now facing a drop in the take home pay they no doubt have come to rely on. The word from Washington is that there is no appetite in either political party to extend this tax cut for a third year. This means many Americans are going to be in for a shock when they see their first paycheck in January.

A family earning $50,000 will see a $1,000 cut in net pay. A family earning $80,000 will see a $1,600 cut and a family earning a combined income of $150,000 will lose $3,000 in spendable income.

For the simple reason that Americans would become used to the tax cut, this tax holiday was a bad idea and never should have happened. The idea, of course, was that the increased spending power supposedly generated by the tax cut would stimulate the economy. The actual result was that because of the need to make up the lost revenue for the Social Security trust, the Treasury Department made the payments by increasing the federal debt.

Oh what a tangled web we weave.

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10-17-12

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