Over the past three-plus months, Americans have been challenged like never before. The coronavirus disease 2019 (COVID-19) pandemic has pushed the unemployment rate from near a 50-year low of sub-4% to more than 13%, with over 40 million people filing an initial unemployment claim since March.
It was these clear financial struggles, as well as the need to shut down nonessential businesses to stem the transmission of COVID-19, that coerced Congress and the president to pass and sign the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March.
The CARES Act wasn't enough for many Americans
At the time, throwing a lot of money at the problem looked like a prudent move to make. The CARES Act clocked in at a cost of $2.2 trillion, and it ultimately divvied out $100 billion to hospitals, almost $350 billion for small business loans, $500 billion for distressed industries, and $260 billion for the expansion of the unemployment benefits program. This "expansion" involves paying approved unemployed beneficiaries an extra $600 per week, through July 31, 2020.
However, it's the $300 billion set aside for direct stimulus payouts to workers, their families, and senior citizens that the CARES Act will best be remembered for. According to an update from the Internal Revenue Service on June 4, some 159 million Americans have been issued a stimulus payout (most via direct deposit), totaling $267 billion.
While there's little question that these Economic Impact Payments (as these stimulus payouts are officially known) were sorely needed, the fact remains that they didn't do nearly enough for most Americans. At their maximum, these payouts totaled $1,200 for an individual or $2,400 for couples filing jointly, with $500 kickers added to what a parent or household received for each qualifying dependent child under the age of 17.
But according to an April 22 Money/Morning Consult survey, close to three-quarters of Economic Impact Payment recipients had spent, or expected to spend, their stimulus money in four weeks or less. Put in another context, three out of four people out of work for longer than a month may need some additional financial assistance, especially with the U.S. economy unlikely to rebound at the flip of a switch.
The big question is, if another stimulus bill is passed, what should it entail?
Donald Trump's double-edged stimulus proposal
In recent weeks, President Trump has signaled his willingness to consider a second round of stimulus for the American public. Although some of Trump's Republican colleagues, such as Senate Majority Leader Mitch McConnell (R-Ky.), have expressed serious concern with further increasing the federal deficit in fiscal 2020, the president also understands that it's an election year, which makes it likelier that both parties will go to bat for the public.
However, Trump has also been adamant that any new stimulus legislation include some form of payroll tax cut for working Americans.
For those of you who might be aware, Social Security and Medicare are funded with a 15.3% payroll tax on earned income (i.e., wages and salary, but not investment income). Although all earned income is hit with Medicare's 2.9% tax, only earned income between $0.01 and $137,700 is subjected to Social Security's 12.4% payroll tax. What President Trump has proposed is a payroll tax holiday or permanent reduction to Social Security's 12.4% payroll tax. It should be noted that if you work for a company or someone else, your employer covers half of your payroll tax liability (thus, 7.65% combined each).
Why reduce payroll taxes? To begin with, providing a payroll tax holiday or permanent payroll tax cut means not having to parse out trillions of dollars in aid via a stimulus bill. In addition, it puts more money into the pockets of working Americans over a longer period of time. Rather than handing a $1,200 check to the average working American, they would instead receive larger paychecks. Lastly, it gives people incentive to work, since they'd be able to keep more of what they earn.
That may all sound great on paper, but Trump's insistence on a payroll tax cut (whether temporary or permanent) is a double-edged sword.
One of the more immediate concerns with the Trump's stimulus plan is that it does nothing for the millions of people who are out of work. Unemployment benefits aren't subjected to Social Security's payroll tax, therefore reducing the payroll tax on a temporary or permanent basis would offer the unemployed no assistance.
But the bigger concern is that any sort of payroll tax holiday or permanent reduction could cripple the longevity of the Social Security program. In 2019, the payroll tax on earned income accounted for 89% of the $1.06 trillion collected by the program. Reducing or removing the payroll tax, even for a short period of time, could have disastrous consequences for Social Security.
As a reminder, the Social Security Board of Trustees has already cautioned that the program won't bring in enough revenue over the next 75 years to cover its projected outlays. Social Security is already facing an estimated $16.8 trillion in unfunded obligations, through 2094. Should President Trump's stimulus plan be put into effect, this cash shortfall would almost certainly rise. It would also, likely, shorten the time frame before the program exhausts its asset reserves, which is currently expected in 2035.
Though President Trump has been insistent on a payroll tax cut, I find it hard to believe that lawmakers would agree to such terms knowing the harm it could cause to the Social Security program.