By AnnaMaria Andriotis
The apparent failure of Congress’s supercommittee to reach a deal on the deficit could give many employees the equivalent of a pay cut next year.
One of the issues on the table for the debt panel was whether to extend the payroll tax cut, which increased employees’ take-home pay by 2 percentage points this year. If Congress fails to take action by year’s end, consumers would feel the impact on several levels, experts say. First, their take-home pay will decrease. The amount may not seem like much to some — the benefit tops out at around $2,100 per year for anyone making $106,800 or more — but after a year of using that money to cover expenses or to boost savings, a cutback would require families to draw up a new budget for 2012, says Stuart Ritter, a certified financial planner at T. Rowe Price.
Even worse, higher payroll taxes could result in higher unemployment. An estimated 1.1 million people will lose their jobs if this cut gets eliminated, says Andrew Fieldhouse, federal budget policy analyst with the Economic Policy Institute, a think tank. Since consumers will have less money to spend, he says, that would result in fewer sales and a reduction of jobs. The ripple effect might not stop there. Ending the tax cut would slow economic growth by nearly one percentage point in 2012, says Fieldhouse. For investors, that could mean a fresh round of stock market losses to come.
To be sure, it’s still unknown whether Congress will move to extend this tax cut. A last-minute deal at the end of this year could still happen, especially if economic data and projections worsen and concerns about a spillover from Europe’s economic debt woes intensify, says Fieldhouse.
For now, though, experts say consumers budgeting for next year might want to exclude the extra money they’ve been receiving from the payroll tax cut. That won’t be easy, cautions Ritter, since it will require consumers to either cut back spending or to find new ways to make more money. He suggests families build up their emergency savings account – which should cover three to six months of living expenses – to protect themselves from any last minute surprises.
This emergency money, which should be in a savings or checking account, will be even more important if Congress allows extended unemployment benefits to expire at the end of this year; that’s another issue that’s at risk if the supercommittee collapses, Fieldhouse says. Benefits, which currently run for up to 99 weeks (this varies by state), could get slashed back down to 26 to 46 weeks.