Payroll tax

Not just the rich whose taxes are going up; with payroll holiday over, the bill comes due

Many workers who pick up their first paycheck of the year today will find it short, and that is going to hurt.

Starting Jan. 1, Social Security withholding began to take 6.2 percent of each paycheck, up to a limit that most wage-earners will not reach. Payments into other retirement plans, specifically PERA, will not change. Continuing the 2 percent payroll tax holiday that bolstered take-home pay for 2011 and 2012 was not a serious consideration during “fiscal cliff” talks. Neither party showed any will to preserve it, and the public, concerned about the future viability of Social Security, did not push very hard. The temporary reduction did not directly affect their future benefits, nor will the 2013 restoration of the normal rate, because benefit levels are part of a much larger discussion about the future of “entitlements.”

The snarky use of that word irritates current and future Social Security recipients, who contend – logically – that they indeed are entitled to what they – have been projected to receive, because they paid what they have been asked to pay and should not be penalized for their government’s inability to manage its finances. That argument would seem to be strengthened by a 2 percent reduction in the amount of their earnings that is available for them to spend now.

It is fair to require wage-earners to fund their own retirement (which few do through Social Security), and it is more than fair to require the government to handle their contributions responsibly. What does not feel quite so fair is that for many people, the recession that prompted the temporary payroll-tax reduction is still reflected in their finances. The economy may be booming in some places, but that is far from universally true. While Americans were very grateful for the two-year tax break, discontinuing it now is likely to be painful.

That pain will be shared not only by workers with diminished paychecks, but by the merchants who serve them. Housing costs are not going down, nor are utilities (especially, this month, heating bills). Food bills are not likely to shrink. Gas prices are lower, but no one expects that reprieve to last very long.

Assuming – and this assumption is hardly safe – that the basics are covered, the budget category that is most flexible is the one termed “discretionary spending.” Restaurant meals and bar tabs fall in that category, for example. Vacation travel certainly does.

The economic problem is that the spending is only discretionary the first time around. On the second round, it is someone’s paycheck. Restaurants, bars and entertainment venues pay wages and taxes, as do airlines and gas stations. Reduced spending ripples through the economy, and a 2 percent change in personal income is a much bigger change for some businesses. That initial 2 percent can be the tipping point between business survival and failure.

None of that means that reverting to regular Social Security withholding is not the right thing to do. None of the solutions to the federal deficit is going to be painless. This one, though, hits low-wage workers especially hard, and they did not have much time to plan for it. There were obvious clues that the holiday would end, and perhaps most Americans would not have planned no matter what they knew and when they knew it.

But that is really not an excuse for Congress to let fiscal decisions that affect so many people drag past the deadline and into the new year.

Watching this change play out will be interesting – for those who are not scrambling to revise their budgets and figure out how to pay their bills.