Here's a Resolution You Can Keep

Uncle Sam just made your New Year’s resolution attainable.

January 24, 2011

Did you make a New Year’s Resolution recently?

You know, lose 15 pounds by your birthday in May. Get to the gym more often. Eat healthy.

How often have you reached those New Year’s goals. Never? Join my club.

Here’s a resolution you can reach without too much difficulty, but you have to act now: Increase your retirement savings by two percentage points.

After all, this year every working person has been given a 2% raise by the federal government. Uncle Sam is not taking as much out of your paycheck as he normally does.

That’s because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 makes a major change in withholding Social Security taxes from employees.

For wages paid in 2011, Social Security tax will be reduced from 6.2% to 4.2% for the first $106,800. The maximum that can be withheld will be $4,485.60—a decrease of $2,136 from the 2010 maximum of $6,621.60.

The effective period of reduced Social Security tax for employees is Jan. 1 thorough Dec. 31, 2011, as determined by payroll check date.

I know I’ve written before that every working person should increase his or her savings rate with every raise. I called it the “Archie Cameron” rule, because Arch—head of CUNA’s HR department oh so long ago—taught me that lesson in 1976 when I first started writing for Credit Union Magazine.

“You won’t miss it because you never had it,” he said. “And after a while, you’ll see how it adds up and you’ll be glad you did.”

He was right. And now, whether you agree or disagree with the legislation, Uncle Sam has given you an unexpected raise.

Save it.

In fact, I’d venture to say every human resource department worth its salt should remind its employees right now that their paychecks are bigger and it’s a great time to bump up their retirement savings contributions.

Until this year, the Federal Insurance Contributions Act (FICA) required a 12.4% payment of earned income up to an annual limit of $106,800. It was paid into Social Security. Another 2.9% was paid into Medicare.

Of course, there are no earned income limits for Medicare taxes—so peeps earning more than $106,800 still owe Medicare tax on their total earned income. Why Social Security stops at that point is beyond me, but that’s another column.

Most of us are wage or salaried employees, which means we’ve only been paying about half of the FICA tax—6.2% for Social Security (again, only 4.2% for 2011) and 1.45% for Medicare. Our employers pay the other half.

Self-employed people have to pay both the employee’s side and the employer’s side, but they do get deduct half of this self-employment tax as a business expense.

So, if you are tired of making New Year’s resolutions and not living up to them, here’s one that should be painless. All it takes is a little discipline and maybe saying no to yourself.

Come to think of it, that’s all the other resolutions took, too.

JAMES HANSON is vice president of business to consumer publishing for the Credit Union National Association. Contact him at 608-231-4080.