Social Security is financed by payroll taxes, which are paid by covered workers and their employers. In the absence of a payroll tax reduction, employees and employers would each pay 6.2% of covered earnings, up to an annual limit, whereas self-employed individuals would pay 12.4% of net self-employment income, up to an annual limit. In December 2010, Congress temporarily reduced the employee and self-employed shares by two percentage points (to 4.2% for employees and 10.4% for the self-employed), with the Social Security trust funds "made whole" by a transfer of general revenue. The temporary reduction was scheduled to expire at the end of 2011, but was extended for two months as part of the Temporary Payroll Tax Cut Continuation Act of 2011 ( P.L. 112-78 ). The temporary payroll tax rate reduction was extended through the end of 2012 in the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ) and subsequently allowed to expire at the end of 2012. However, the use of offsets to reduce the budgetary cost of repaying the Social Security trust funds would reduce the stimulative effect, though the choice of offsets can influence the magnitude of the reduction. This report briefly discusses economic stimulus considerations related to temporary payroll tax reductions and efforts to offset the budgetary cost of an extension. For a discussion of Social Security policy considerations concerning a temporary payroll tax reduction, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction , by [author name scrubbed]. To address long-term fiscal objectives, some proposals to extend or expand the temporary reduction in payroll taxes include one or more offsets to reduce or eliminate the net budgetary cost of the proposals. Paying for a Temporary Payroll Tax Reduction: Options and Considerations

Extending the two percentage point payroll tax reduction through the end of 2012 cost an estimated $93.2 billion. Offsets that reduce spending, or increase revenues, are contractionary. While offsets address the issue of long-term fiscal sustainability, depending on design, they can diminish the short-term stimulative effects of the tax cut. Having offsets occur after the period of economic weakness has passed could limit short-term contractionary effects while simultaneously promoting long-term fiscal sustainability. High-income taxpayer benefits from the payroll tax rate reduction are also limited. The federal employee pension provisions enacted in P.L. This option was not used to offset the payroll tax rate reduction extension as enacted in the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ).
Social Security is financed by payroll taxes, which are paid by covered workers and their employers. In the absence of a payroll tax reduction, employees and employers would each pay 6.2% of covered earnings, up to an annual limit, whereas self-employed individuals would pay 12.4% of net self-employment income, up to an annual limit.
In an effort to stimulate the economy, Congress, in December 2010, temporarily reduced the employee and self-employed shares by two points (to 4.2% for employees and 10.4% for the self-employed), with the Social Security trust funds "made whole" by a transfer of general revenue. The temporary reduction was scheduled to expire at the end of 2011, but the reduction was extended for two months as part of the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78).
The payroll tax rate reduction was extended through the end of 2012 in the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96). Extending the reduction through the end of 2012 would, by itself, increase the deficit by an estimated $93.2 billion—raising concerns about the apparent incompatibility of an extension with long-term goals of fiscal sustainability.
Earlier proposals to extend the payroll tax reduction included some form of budgetary offset to reduce or eliminate the effect on the deficit and address concerns about long-term fiscal sustainability. Among the budgetary offsets mentioned in extension proposals were a surtax on high-income individuals, freezing federal employee pay, and limiting certain federal benefits to high-income individuals. Ultimately, both the Temporary Payroll Tax Cut Continuation Act of 2012 (P.L. 112-78) and the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96) extended the payroll tax rate reduction for the remainder of 2012 without offset. The payroll tax rate reduction expired at the end of 2012.
Budgetary offsets are contractionary—as they either reduce spending or increase revenues. The degree to which they are contractionary in the short term, however, depends on design and the populations affected. For example, having offsets occur after the period of economic weakness has passed could limit short-term contractionary effects while simultaneously promoting long-term fiscal sustainability. In contrast, offsets that fall on individuals facing financial constraints would be expected to have larger contractionary effects.
This report briefly discusses economic stimulus considerations related to temporary payroll tax reductions. In addition, as the Social Security trust fund is made whole through a transfer from the general fund, select options to offset this increase in the deficit will be examined to illustrate how the choice of offsets can affect the net amount of economic stimulus provided. For a discussion of Social Security policy considerations concerning a temporary payroll tax reduction, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction, by [author name scrubbed].