Debt Deal Fallout: Start Preparing For Your 2% Pay Cut

By now, everybody is aware that the debt deal passed.  I always figured it would and that it would take until the last minute.  It’s just how things get done, especially in today’s ultra-partisan government.

One of the things that it included means that anybody that works should be prepared for a 2% pay cut starting next year.

How’s that?

Simple.  The FICA payroll tax holiday, where taxes were rolled back by 2% for 2011, have virtually no chance of being renewed under the agreed terms.  Although it was only a one year agreement originally, the hope was that it would be able to be extended for at least another year (hmm, just up until elections, how convenient would that have been?).

This could end up being a problem for many.  Smart people with the means to do so took the 2% and just stashed it somehow, whether it be through increased retirement savings or some other way of socking it aside.  But, my guess is that the vast majority of people incorporated it into their everyday budget, which will make it much more difficult to take out come that first paycheck of 2012.  For that reason, I never thought much of the payroll tax holiday, simply because, as the ‘temporary’ Bush tax cuts proved, once you put money in people’s pockets, there’s going to be some major protesting when you try to take it back.

So, if you’re lucky enough to get a raise before the end of the year, you should knock off 2% of whatever you get, because that’s going to be going away within a few months.

Personally, I’m not sure how it will play out.  We haven’t gotten raises in the last two years, and there’s hope that it will finally be the year where raises are awarded, though I’m guessing it won’t be more than 3%, which would effectively work out to zero since I hope to bump up my 401(k) contribution by 1% when a raise eventually happens.

For us, it will also depend on health care. Our ‘holiday’ essentially went to paying higher premiums that were jammed down our throats in 2011.  Knowing that we were having a baby, we ended up selecting a plan that had higher premiums. With no planned babies (and hopefully no major health care expenses) in 2012, we are hoping to select a plan that would cost us a little less, which could help offset the 2% holiday expiration.

This doesn’t even touch on the possible impact to the economy, as the ‘holiday’ was designed to increase consumer spending, and even that hasn’t really been too solid this year.  It seems a foregone conclusion that we’re headed towards a double-dip recession, and this certainly will not help make that any easier.

How will the resumption of the 2% FICA tax impact you?  What do you think it means to the economy?

10 thoughts on “Debt Deal Fallout: Start Preparing For Your 2% Pay Cut”

  1. Hard to predict what's going to happen in the short term, as the election silly season looms. We well see a shadow QE3 program implemented by the Fed to goose the economy.
    Longer term, it's a murkier picture. But of one thing I'm certain: less manufacturing and decreasing production equals less prosperity.

  2. Sorry to hear about this. It won't effect me as much in Canada. However I can relate to a raise in taxes. Here in Canada, I pay 46% income tax on everything I earn. It really sucks. Plus they keep raising our property and school taxes. I guess, when governments need money, taxes go up or raises cease- it's how they get what they need.

  3. I got a raise this year – my employer said my salary was lower than 85% of the industry average for my position, so I got a small raise. It should offset the 2% pay cut that's coming

  4. @Jeff: Wow–how did that make you feel? I would've been upset, though at least your employer told you that.

    Good point on the 2% raise we all saw. Guess we'll see!

  5. As we take out savings before the spending money hits our checking account, we never saw the increase. I guess I will have to figure out a way to cut our expenses so that the saving amount stays the same.

  6. Thankfully I don't pay into social security so I didn't get the break when it happened… so I won't have the pain when it goes away.

    But I also haven't gotten a raise in a while… so we just keep re-adjusting our budget when my paycheck keeps shrinking.

  7. @South County – It's the same way here, we keep readjusting. It'd be nice for once to not have to do that! LOL

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