Trump’s payroll tax holiday will undermine Social Security and Medicare. Here’s how | Ray E. Landis

July 23, 2020 6:30 am

WASHINGTON, DC – APRIL 24: U.S. President Donald Trump participates in a signing ceremony for H.R.266, the Paycheck Protection Program and Health Care Enhancement Act, with members of his administration and Republican lawmakers in the Oval Office of the White House in Washington DC on April 24th, 2020. The bill includes an additional $321 billion for the Paycheck Protection Programs forgivable loans to cover payroll and other costs for small businesses. Hospitals and other health care providers will receive $75 billion and another $25 billion is allocated for COVID-19 testing. (Photo by Anna Moneymaker/The New York Times/POOL/Getty Images)

President Donald Trump said a lot of eyebrow-raising things in his July 19 interview with Fox News anchor Chris Wallace. One which demands immediate attention is his threat to not sign further economic stimulus legislation unless a payroll tax holiday is included in the package.

The payroll tax is how we refer to the deductions taken out of everyone’s paycheck for payments into the Social Security and Medicare programs. Employees and employers pay 6.2 percent of wages up to $137,700 in annual income into Social Security and 1.45 percent of wages with no income limit into Medicare.

Trump looks at a payroll tax holiday as a way to show he is putting more money in people’s pockets, especially as the election nears.

He uses the argument the consumer spending that would result would stimulate the economy. Opponents of the payroll tax holiday, which appear to include members of Congress on both sides of the aisle, note that retirees or anyone who has lost their job or has had their hours reduced would see little, if any, benefit, so this scheme would favor the wealthy and add to the nation’s income disparity.

Beyond the debate about the effectiveness of a payroll tax cut, however, is the question of the impact on Social Security and Medicare. Unlike most government programs, Social Security is not a pay-as-you-go program. Social Security has accumulated a significant reserve fund which has guaranteed payments to retirees through good and bad economic periods.

Demographic changes threaten Social Security, however. The most recent Social Security Trustees report notes in 2020, for the first time since Social Security was established, the system will pay out more in benefits than it will take in through payroll taxes.

This pattern will accelerate over the next fifteen years until the reserve fund is depleted in 2035.  At that point, unless changes are made, Social Security will only be able to pay approximately 75 percent of promised benefits.

Medicare is in an even more difficult financial situation. Medicare Part A, the Hospital Insurance Fund, is projected to exhaust its reserve fund in 2026. At that point Medicare Part A will be able to pay 89% of anticipated costs, and that percentage will gradually decrease to 77 percent by 2046.

Frightened by the impact of the hard decisions that must be made, Congress and various Presidential Administrations have pushed debate about how to extend the financial solvency of Social Security and Medicare into the future.

Delaying this difficult discussion makes the solutions even harder.  But throwing a payroll tax holiday into the mix makes the outlook for Social Security and Medicare tremendously uncertain.

A payroll tax holiday would result in a loss of revenue for Social Security and Medicare. Proponents of the payroll tax holiday claim the shortfall would eventually be replaced from the general fund.

But already deficit hawks are complaining loudly about the growing imbalance in federal spending versus revenues as a result of the need for economic stimulus measures during the pandemic response.

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As the federal deficit grows, the likelihood of repayment of funds lost to Social Security and Medicare because of a payroll tax holiday diminishes and the potential of reductions in Social Security and Medicare benefits as a part of discussions about the overall federal budget increases.

Former U.S. House Speaker Paul Ryan, a Wisconsin Republican, advocated changes to Social Security and Medicare to lower their costs and reduce their benefits.

Ryan’s views are still prevalent in many corners of the current Administration and Congress. Proponents of an immediate payroll tax holiday may claim it is to give a boost to the economy, but the plan fits very well into the narrative of reducing the financial stability of Social Security and Medicare.

Such an action would eventually force significant cuts in benefits, such as raising the retirement age and reducing monthly payments for Social Security or increasing premiums, deductibles, and co-pays for Medicare, that would change the nature of the programs and plunge more older Americans into poverty.

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Our current health crisis has placed the United States in a perilous economic situation, which continues to require swift and decisive action by our elected officials.

But we cannot lose sight of future needs as we address the present. We know that addressing the challenges of an aging population will be a significant public policy debate in coming years. We must not exacerbate the situation by undermining the future of Social Security and Medicare through a payroll tax holiday.

Ray E. Landis writes about issues important to older Pennsylvanians. His work appears biweekly on the Capital-Star’s Commentary Page. Follow him on Twitter @RayELandis.

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Ray Landis
Ray Landis

A former spokesman for the Pennsylvania AARP, Ray E. Landis writes about the issues that matter to older Pennsylvanians. His work appears biweekly on the Capital-Star's Commentary Page. Readers may follow him on Twitter @RELandis.