The Congress and the President have agreed to reduce employees' Social Security payroll taxes from 6.2% to 4.2%. Other proposals put forward would have suspended payroll taxes paid by both employees and employers, which would have equaled 12.4% of covered wages.
Trustees for Social Security were already predicting a deficit for 2011 before the proposed payroll tax cut. Orange County tax attorneys point out that a projected surplus between 2012 and 2014 may have to be recalculated too.
The potential loss of revenue for Social Security from the payroll tax cut is $120 billion. But as of 2009, the Social Security trust fund had $2.34 trillion in assets. Even with the $120 billion loss, the program is in no immediate danger of failure.
Forecasts by the Social Security Administration have estimated that Social Security will run out of funds around 2037.
Craig Copeland, senior research associate with the Employee Benefit Research Institute in Washington, was quoted as saying, "The one year isn't going to change it that much. It might make it exhaust one year [earlier] but the overall impact is not going to be tremendous." So the question becomes one of whether this will be a one-year suspension, or a longer payroll tax cut.
Copeland warns that if the payroll tax rate is not moved back to its previous level, the entire dynamic of the Social Security trust fund would change, and the program might exhaust its funds much earlier.
Source: Market Watch "Social Security fund can weather tax break" 12/7/2010