What the Payroll Tax ‘Raise’ Really Means

money makerYou’ve probably heard that, starting this month, workers who pay into Social Security will be getting, in effect, a 2% pay increase.

Not really.

True: some 155 million people will be seeing more cash in their paychecks. Someone earning $50,000 would receive an extra $80 or so each month for 2011.

But don’t think of it as a raise.

The money isn’t a perk from your employer, it’s a reduction in the amount being withheld from your paycheck for Social Security, from 6.2% to 4.2%.

So is that a raise, or a reduction in retirement benefits?

Granted, Social Security doesn’t operate like a bank account or IRA. A change in your withholdings now, technically, shouldn’t affect your benefits later. But many economists are concerned about the overall health of the system.

So, even though the government is trying to spin the payroll tax cut as a windfall—hoping you’ll spend to stimulate the economy—we suggest plowing that 2% back where it belongs: in your retirement account, for your future security.

If you’re already on track for retirement, then by all means, spend away.

Just be mindful that a fatter paycheck comes at a price—and put your 2% into things that are worthwhile.

Your cut. What do you think of cutting Social Security withholdings to give workers ‘raises’?

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