Consumers unaware of tax holiday in spite of larger paychecks

A recent poll hosted on the National Foundation for Credit Counseling (NFCC) website revealed that close to half of the 2,037 survey respondents, 46 percent, were unaware of the Social Security tax break which cuts the workers’ share of Social Security payroll taxes by close to one-third during 2011.

Since the tax cut results in a larger paycheck, it is puzzling why so many people remain unaware of this windfall money.  One of the basic elements of personal finance is knowing how much you make, as this should be the basis of all spending decisions.

Since the percentage of the tax cut is the same across the board, the lower wage earners won’t realize as large of a dollar amount increase in their checks. However, those earning up to $106,800, the maximum amount of wages subject to Social Security taxes, could enjoy an extra $2,000 in their paychecks over the course of the year. Regardless of the amount, consumers should put this money to good use while they have it, as the tax cut was only approved for 2011.

For those who were aware of the extra money in their pockets, most indicated they would use it to deal with an existing debt concern. Twenty-two percent responded that they would utilize the money to catch up on past-due bills, while19 percent earmarked the money for increased payments to creditors. Eight percent intend to put the extra money into savings. Only three percent felt that the best use of the money was to prepare for their future by putting it toward increased retirement contributions. While the intent of the tax cut was to stimulate spending, only one percent indicated they would treat themselves to something special, suggesting that consumers are not inclined to begin spending.

The actual poll question and results are as follows:

Q: Paychecks are now larger due to the social security tax holiday. What are you going to do with this windfall money?

A. Save it = 8%
B. Catch up on past-due bills = 22%
C. Increase payments to creditors = 20%
D. Increase retirement contributions = 3%
E. Treat myself to something special = 1%
F. This is news to me - I haven't heard a thing about it = 46% 

MMI is a member of the National Foundation for Credit Counseling.  The NFCC’s February Financial Literacy Opinion Index was conducted via the homepage of the NFCC Web site from February 1-28, 2011 and was answered by 2,037 individuals.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.