For the vast majority of Americans, what we've experienced in 2020 is unprecedented. The coronavirus pandemic has completely upended societal norms and sent the U.S. economy screaming into its steepest recession in decades. All told, nearly 139,000 Americans had lost their lives due to COVID-19 as of a week ago, with over 20 million people being displaced (even if temporarily) from the workforce.
It was this never-before-seen economic disruption in the modern era that prompted Congress to pass and President Trump to sign into law the CARES Act on March 27.
The CARES Act provided a short financial bridge for most Americans
The $2.2 trillion CARES Act represents the priciest piece of relief legislation ever signed into law. It ultimately provided funding for small-business loans, distressed industries, and hospitals, and was responsible for expanding unemployment benefits for four months.
But for many Americans, the best aspect of the CARES Act was the $300 billion allocated toward direct stimulus payments. The Internal Revenue Service notes that over 160 million Americans qualified for an Economic Impact Payment, with more than $270 billion being disbursed. At maximum, individuals and couples could receive $1,200 and $2,400, respectively, with an extra $500 to a parent or household for each qualifying dependent age 16 or younger.
At the time, and given the unprecedented nature of the COVID-19 pandemic, throwing a boatload of money at struggling businesses and Americans seemed a prudent thing to do. Unfortunately, CARES Act stimulus money didn't go very far for the typical recipient. For about three-quarters of stimulus recipients, their payout was gone in four weeks or less.
With the U.S. unemployment rate still at levels last consistently seen in the 1930s, it would certainly appear that another round of stimulus is warranted.
President Trump suggests he won't sign a second stimulus deal without this
With the Senate getting back to work on Monday, July 20, signs definitely suggest that another round of stimulus is coming.
In May, the Democrat-led House of Representatives passed the HEROES Act, which would provide up to $6,000 to married couples with three dependents (up from $3,900 under the CARES Act). Passage of the $3 trillion HEROES Act was a clear indication that Democrats believe additional stimulus is needed to support the public, frontline workers, and small businesses.
Though key Republican leaders have taken time to come around to the idea of a second stimulus deal, they now appear to be on board. Senate Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, and President Trump have all recently offered their support to another round of direct stimulus.
But no matter what shape the next stimulus proposal takes, President Trump has been adamant that he won't sign it if it doesn't contain a provision for a payroll tax holiday.
As you may already know, most working Americans pay a 15.3% payroll tax on their earned income (wages and salary), with 12.4% funding Social Security and 2.9% supprting Medicare. The 12.4% payroll tax applicable to Social Security is capped at $137,700 in 2020, meaning all earned income beyond $137,700 is exempt. Medicare, on the other hand, has no income exemption. Additionally, note that while the self-employed pay the full payroll tax rate, employees of a company are responsible for only half of this liability, with their employer covering the other half.
Under Trump's proposed payroll tax holiday, some or all of the Social Security payroll tax liability paid by working Americans would go away for a period of time. This would effectively increase the amount of money that workers would keep with each paycheck, therefore providing a boost in disposable income.
Trump's insistence on a payroll tax cut is terrible news for Social Security
Should Trump succeed in pushing through a payroll tax holiday, it certainly wouldn't be the first one. In the early 2010s, President Barack Obama, with the help of Vice President (and presumptive Democratic presidential nominee) Joe Biden, passed a two-year partial payroll tax holiday to boost the U.S. economy following the Great Recession.
But just because something has been done before on Capitol Hill doesn't mean it's a good idea.
You see, a payroll tax holiday has two very substantial flaws. First, it's going to provide larger take-home checks to those folks who are working, while providing no additional benefit to the tens of millions of people currently out of the labor force. It could well be argued that the unemployed need extra financial assistance right now, not those who still have a job.
The second and considerably larger concern is that a payroll tax holiday is a direct threat to America's top social program, Social Security.
In 2019, the payroll tax brought in $944.5 billion of the $1.06 trillion collected by Social Security. That's 89% of the program's annual revenue. Reducing this funding (or removing it in its entirety), even for a short time, could prove disastrous.
According to the Social Security Board of Trustees' 2020 report, the program's $2.9 trillion in asset reserves are expected to be completely exhausted by 2035, at which point benefit cuts of up to 24% may be needed for retired workers just to sustain the program's solvency through 2094. Put in another context, Social Security is already facing an estimated $16.8 trillion in unfunded obligations over the next 75 years, and a payroll tax holiday will assuredly worsen this even more.
There's a reason payroll tax cuts are relatively unpopular with Democrats and Republicans, and the president may soon find out that his one demand for a second stimulus has very little support.