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President Trump has thrown in the towel on his demand to cut payroll taxes, and it won’t appear in an economic stimulus bill that Republicans unveil Thursday. It’s an acknowledgment that the president’s idea had little support in Congress, even from fellow Republicans.
If you care about the solvency of critical programs like Social Security and Medicare, this is a big deal, because both would have been weakened by a payroll tax cut.
Read: White House ends payroll tax cut bid as Republicans unveil tax package
Here’s why: Social Security and Medicare are both principally financed by the payroll taxes that Trump wanted to cut. Both workers and their employer pay into the system. Cut those taxes and you undermine the long-term health of these critical social safety net programs. It’s really that simple.
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Why even cut payroll taxes? Trump thought doing so would have given companies more breathing room financially, and help them stay afloat during the pandemic.
Congress would have had to decide how much lower the tax rate should be and how long the tax break should last. Right now you pay (if you’re working, that is), about 7.65% of your income, which is matched by your employer. If you’re among the growing number of Americans who are self-employed, you pay both parts—though you get to deduct the employer portion.
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But was cutting payroll taxes the best way to deal with the economic damage caused by a health crisis in the first place?
In terms of Social Security and Medicare, “it doesn’t make sense,” says Diane Swonk, chief economist at Grant Thornton LLP, a tax and accounting firm. She also warns it could threaten the “government’s commitments to older generations, like baby boomers (born 1946-1964) and the silent generation (born 1928-1945).”
It’s essential to remind Americans that Social Security and Medicare are already somewhat wobbly. Even before the GEC (“Great Economic Collapse”) of 2020 began, Social Security was dipping into its reserves—the so-called Trust Fund—to meet its obligations to older Americans. Because millions of Americans have been laid off—and thus not paying into the system—those reserves are being exhausted even faster.
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Those reserves could be exhausted by 2035, the Social Security Board of Trustees projected in April, after which it will only be able to pay 76% of benefits. What’s worrying is that this report was compiled weeks and months before the economy collapsed, and millions dropped off the payrolls. The Trustees addressed this, warning that “The projections and analysis in this report do not reflect the potential effects of the COVID-19 pandemic on the Social Security and Medicare programs.”
But even without those projections and analysis, it’s hardly unreasonable to suggest that the Trust Fund will be depleted even faster now.
The bottom line: Every dollar taken out of Social Security now brings its day of reckoning closer. If you’re planning to be retired in 2035—just 14 fiscal years away—you may want to consider the financial impact of a 24% cut in benefits.
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For Medicare, the news appears even more dire. The most recent report from that program’s trustees makes the same warning that its projections fail to take COVID-19 into account. But even without them, the trustees predict that the Part A trust fund (which pays for hospital and other inpatient care) could start to run out of money in 2026.
Again, it’s a safe bet that COVID-19 has made this worse.
In a broader sense, Trump’s thinking that he could use tax cuts to fix an economy that has been knocked down by a pandemic is wrongheaded, Swonk says. “Economists have been pretty unambiguous, with the exception of a small minority, that this is first, last and foremost a health crisis; the course of COVID will determine the course of the economy.” Contain the virus, and the economy will recover.
The president’s retreat seemed inevitable, following comments Tuesday by Senate Majority Leader Mitch McConnell (R-KY).
“There are some differences of opinion on the question of the payroll-tax cut and whether that’s the best way to go,” he said.
What is the best way to go? Not tax cuts, but another round of stimulus checks for hard-hit American families. Different ideas are being discussed, but this second round of aid will likely be in the $1,200 range, similar to what most individuals with incomes below $75,000 got earlier this year.
What isn’t the best way to go? Doing something that inflicts long-term damage on programs that all Americans will rely on at some point in their lives. If anything, in this time of heightened uncertainty, Americans need to be reassured that Social Security and Medicare—which we have all paid into over the course of our entire working lifetimes—are secure, and that promises made by the government will be honored.