Two Percent Solution?

Staff Writer
Columbus CEO

You say you got no raise this year, but you've still seen a little bump in your take-home pay? Check the Social Security withholding line on your paycheck, and you'll notice the feds are taking only 4.2 percent, not the usual 6.2 percent. If you're making $1,000 a week, that means an extra $20--2 percent of your gross pay--going right into your wallet.

You can thank Congress for the modest windfall. In an effort to boost consumer spending, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 mandated a 2 percent cut in Social Security withholding for 2011 only.

Is the strategy working? Well, in late June the U.S. Department of Commerce's Bureau of Economic Analysis (BEA) reported that Americans' personal income was up 1.8 percent in the first quarter of 2011, compared to the fourth quarter of 2010.

All states saw increases, ranging from 0.7 percent in Iowa to 6.9 percent in North Dakota. Ohio ranked 20th with a slightly-above-average increase of 1.9 percent. Bill LaFayette, vice president of economic analysis for the Columbus Chamber, says Ohio's labor market is performing better than the national average after a "horrible decade."

Lafayette's not a big fan of the temporary Social Security cut, though. He says growing employment, rather than cutting Social Security contributions, "makes for a much more sustainable increase in income growth. Ultimately, what you like to see is income growing from underlying economic activity, and first quarter growth wasn't very good."

Jim Newton, chief economic advisor for Commerce National Bank, says the Social Security reduction "potentially could have had some impact--personally, I don't think it would have been a tremendous one. But unfortunately, that 2 percent reduction in the Social Security rate coincided with higher energy costs ... so it was pretty much a wash."

And, as Newton points out, "The federal government is going to have to pony up the $100 billion in Social Security monies that would have normally been paid by people paying Social Security taxes through that normal 6.2 percentage contribution rate. ... When you say, ‘the government pays it,' that's the equivalent of saying that ‘the taxpayers are going to pay it.' "

Reprinted from the August 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.