It’s true that the agreement reached by Democrats and Republicans on January 1st averted a tax increase for 99% of us. Nevertheless, taxes will increase in 2013. Why? Because the reduction in Social Security taxes that we enjoyed in 2011 and that was extended to 2012 will expire. For employees, this means a rate increase of 2%, from 4.2% to 6.2%. For individuals making $50,000 a year, this means having an added $1,000 taken out of their pockets.
Although the argument for letting the 4.2 rate expire is not yet being yelled from the bell towers, it is a legitimate one. In 2010 and 2011, the Social Security tax did not collect enough money to cover the benefits paid out. Even at the rate of 6.2%, some say there will be a continued shortfall throwing us off another fiscal cliff in the not too distant future.
With Social Security costs continuing to rise as more and more baby boomers reach retirement age, we can expect that this discussion won’t go away. So what’s in store – more taxes, reduced Social Security benefits, or both? Time will tell.