Ask the Advisor: September 2020

Ask the Advisor: September 2020

How Would a Payroll Tax Cut Impact Social Security Benefits?

Q:  How would President Trump’s Executive Order cutting payroll taxes affect Social Security?  I recall, there was a payroll tax cut in the stimulus package signed by President Obama during the Great Recession.

A:  Earlier this year, President Trump said he would not support any additional stimulus measures in response to the COVID-19 pandemic unless lawmakers included a payroll tax cut.  The Senate adjourned for August recess, however, without any agreement on a stimulus package.  Frustrated, the President instead signed Executive Orders for a payroll tax cut drawing authority from section 7508A of the U.S. tax code which allows the Secretary of the Treasury to defer the payment of taxes if the taxpayer is affected by a federally - declared emergency like the coronavirus.

But while the President may have the power to postpone the collection of taxes, he does not have the power to forgive those taxes.  According to an article appearing in Forbes by Kelly Phillips Erb, a senior contributor on taxes, the Executive Order directs the Secretary of the Treasury to explore legislation to eliminate the obligation to pay the taxes deferred.

The Executive Order doesn’t apply to all workers, only those earning about $100,000 annually.  Erb writes that the average worker will be able to put off paying just under $800 for the term of the deferral, September 1, 2020 – December 31, 2020 or about $60 per week.  But right now, the move is only temporary, and workers will be expected to repay the taxes next year.  President Trump has said that “If I’m victorious on November 3, I plan to forgive these takes and make permanent cuts to the payroll tax.”

As you point out, the idea to use a payroll tax cut to stimulate the economy was done before, during the Great Recession.  The difference this time is scale.

The “Making Work Pay” tax credit which became effective for 2009 and 2010 during the Great Recession, equaled 6.2% of earned income up to a maximum of $400 (individual) or $800 (for couples).  It phased out at 2 percent of income over $75,000 ($150,000 for couples).  Individuals with earnings between about $6,450 and $75,000 (between about $12,900 and $150,000 for couples) could claim the full credit.  Those with incomes exceeding $95,000 ($190,000 for couples) received no credit.

What President Trump has proposed is to completely eliminate both the employee and employer share of payroll taxes which together amount to 15.3% — that’s 12.4% for Social Security and another 2.9% for Medicare on the first $137,700 of earnings.  That would eliminate the major source of funding for the benefits of both current and future retirees.

Your Social Security and Medicare benefits are financed primarily by current payroll tax revenues.  Social Security is already paying out more in benefits than received in payroll taxes.  The Medicare Hospital Insurance Trust Fund may become insolvent in less than six years.  The coronavirus recession is expected to both reduce payroll tax revenues while increasing the number of new claims from older workers who lose their jobs and file claims earlier than planned.

When the “Making Work Pay” tax credit was enacted, Congress appropriated general fund revenues to replenish the trust funds.  But it is not clear whether that would happen if this payroll tax deferral would become a permanent payroll tax cut.

TSCL is adamantly opposed to payroll tax cuts because they provide no help whatsoever to people who have lost their jobs, while weakening the funding of benefits for today’s retirees.  In addition, TSCL is adamantly opposed to eliminating payroll taxes — Social Security and Medicare’s main source of dedicated revenues.


Sources: “Trump Proposes Eliminating Payroll Tax Through The End of the Year,” Pettypiece, Welker, Caldwell, NBC News, March 11, 2020.  “What Did The 2008-10 Tax Stimulus Acts Do?” Tax Policy Center, Urban Institute and Brookings Institution, July 4, 2020.  “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, Memorandum for the Secretary of the Treasury, The White House, August 8, 2020.  “Despite Questions, President Trump Issues Executive Order to Create Temporary Payroll Tax Cut,” Kelly Phillips Erb, Forbes, August 8, 2020.