Tuesday, February 01, 2011

Nudging towards Ricardian equivalence

I just got an email from the Texas A&M System Benefits Administration:
On January 1st all wage earners received a 2% raise, thanks to the recently passed tax package. The amount you usually contribute to the Social Security system, 6.2% of your first $106,800 of wages, is reduced to 4.2% for 2011. That 2% savings could be as much as $2,136 over the course of the year.

A fiscally-responsible New Year's resolution would be to take that extra money and put it to good use by:

- Increasing your TDA 403(b) or Texa$aver 457 contribution
- Increasing the amount you pay towards your credit card balances
- Depositing it directly into your savings or investment account

Remember this change is only for 2011. If you increase your spending, you will have to make a downward adjustment on Jan 1, 2012 when your Social Security withholding reverts back to 6.2%. A better solution would be to use this money towards a financial goal and keep your spending at its current level. [Emphasis added.]

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