There's no question that the coronavirus disease 2019 (COVID-19) has changed our way of life over the past five weeks. With nearly 500,000 confirmed cases in the U.S. alone and almost 1.7 million worldwide as of one week ago, mitigation measures are absolutely necessary to stem the tide of transmission and protect the well-being of Americans.
But these unprecedented measures have also shut down nonessential businesses and, as of last week, pushed almost 17 million people to file for unemployment benefits. Without federal aid, American workers and the U.S. economy would be in very big trouble.
Last month, on March 27, lawmakers passed, and President Trump signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. This $2.2 trillion package sets aside $500 billion for distressed businesses, $350 billion for small business loans, $260 billion for an expansion of the unemployment program, and $300 billion for direct stimulus payments to perhaps 175 million working Americans and seniors.
President Trump really, really wants to cut Social Security's payroll tax
But even this may not be enough to prop up struggling workers, their families, and the world's largest economy by gross domestic product in the short run. That's why President Trump has another proposal in mind.
In March, when the details of what eventually became the CARES Act were being worked out among legislators on Capitol Hill, Trump proposed the idea of a payroll tax holiday through the remainder of the year (i.e., April 1, 2020 to Dec. 31, 2020). The payroll tax is a 12.4% tax applied to earned income between $0.01 and $137,700 in 2020. "Earned income" means wages and salary but not investment income.
Why a payroll tax holiday? In Trump's view, passing a partial payroll tax holiday would be simple to do and put money directly into the pockets of working Americans throughout the remainder of the year. Without any payroll tax liability for the final nine months of 2020, a person earning $50,000 a year would keep an extra $2,325 if employed by someone else, or $4,650 if self-employed.
Believe it or not, a payroll tax holiday has been done before. Following the Great Recession, the Obama administration passed a partial payroll tax holiday in 2011 and 2012 for employers and employees, which reduced their liabilities by 2 percentage points. This wound up allowing workers and employers to keep around $109 billion, in total.
However, Trump's desire to cut the payroll tax doesn't end with 2020. When recently asked his opinion on payroll tax cuts, the President hinted that he'd like to see reductions to the payroll tax become permanent. Further, he noted that his desire to cut workers' payroll tax liability would be consistent, whether or not the country were dealing with the coronavirus. Here are some snippets of what President Trump had to say to White House reporters:
I would love to see a payroll tax cut, and I think on behalf of the people it would be quick... There are many people that would like to see it as a permanent tax cut... You'd get a lot of people a lot of money immediately. The payroll tax cut would be a great thing for this country. I would like to have it regardless of this [the coronavirus pandemic].
Trump's payroll tax cut would decimate the Social Security program
While the idea of reducing the amount of payroll tax collected might sound great, a permanent cut to the payroll tax would not be benign by any means. It would, in fact, completely gut the Social Security program and put the retirements of tens of millions of seniors in jeopardy.
The payroll tax is one of three sources of funding for the Social Security program, along with the taxation of benefits and the interest income earned in its nearly $2.9 trillion in asset reserves. Of the $1 trillion collected in 2018 by Social Security, the payroll tax was responsible for generating $885 billion. It's unquestionably the workhorse for our nation's most successful social program.
If Trump were granted his wish of a complete payroll tax holiday for the remainder of 2020, I'd estimate that Social Security's net-cash outflow for the year might hit $700 billion. For context, the worst single-net-cash outflow for Social Security over the past 80 years was $5.3 billion. In just nine months, the Social Security program would potentially have wiped away a quarter of its almost $2.9 trillion in asset reserves.
Now, imagine if a partial cut to the payroll tax became permanent. Not only would we witness an even quicker depletion of Social Security's asset reserves than is already expected, but it also would almost certainly result in the need for steeper cuts to retired workers' benefits just to keep the program solvent for the long run. With 62% of current retirees leaning on Social Security for at least half of their income, and another 34% counting on the program for virtually all (90%+) of the income they receive, any sort of extended reduction to the payroll tax would seriously jeopardize the ability of these folks to make ends meet.
In actuality, the most recent Social Security Board of Trustees report forecast the need to increase the payroll tax by 2.78% immediately (i.e., to 15.18% from 12.4%) in order to stave off an expected $13.9 trillion cash shortfall between 2035 and 2093. What Trump is suggesting is the exact opposite of the recommendation offered by the Trustees report.
Trump's payroll tax proposal has no legs
If there's some solace for current and future retirees, it's that Trump's call for a partial or permanent payroll tax holiday are almost certainly falling on deaf ears. In order to pass such a measure, Trump would need bipartisan support in the Senate and majority support in the House of Representatives. With the House led by Democrats and no supermajority in the Senate, there simply wouldn't be enough support for a payroll tax holiday if lawmakers voted according to party lines.
Even beyond party lines, I don't think there would be enough support for a measure that would almost certainly gut the Social Security program.
In other words, current and future Social Security beneficiaries will be receiving a payout -- assuming they qualify for one -- and the payroll tax is the main reason why. As long as the payroll tax remains the program's primary funding mechanism, Social Security is incapable of going bankrupt.