Payroll tax cut could mean Social Security benefits run out sooner
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President Donald Trump recently issued an executive action that temporarily suspended payroll taxes for employees earning $100,000 and less. The legality and practicality of his executive memorandum is in dispute, and it hasn’t been popular on Capitol Hill.
The bigger worry among many economists is that any move toward lowering payroll taxes during a pandemic recession will put additional financial pressure on Social Security.
“Marketplace Morning Report” host David Brancaccio spoke about that with Marketplace senior economics contributor Chris Farrell. The following is an edited transcript of their conversation.
David Brancaccio: Clearly Trump did want to cut the payroll tax, at least for a short period of time this fall.
Chris Farrell: Well, he’s been consistent about that. But here’s the crux of the worry, this is what economists are really afraid of: Cutting payroll taxes could move up that long-anticipated date of the Social Security trust fund depletion by several years.
Brancaccio: But that doesn’t mean Social Security suddenly goes bankrupt and stops paying at that moment.
Farrell: Yeah, but here’s what it means: The depletion date, which was projected by the Social Security’s trustees before the pandemic, they put it at 2035. And that marks the year when payroll tax revenue will only cover 79% of promised benefits. So, now we have this high unemployment with the pandemic recession, fewer people are paying their payroll taxes, the high business failure rate, particularly among small businesses, less money going into Social Security. So when you take this pandemic recession, if you combine that with a payroll tax cut, well, the date of the Social Security fiscal crisis could be moved up earlier.
Brancaccio: By how much, though, you think?
Farrell: OK, so there’s a range of estimates. But the Bipartisan Policy Center, it uses the Great Recession of a dozen years ago as its baseline. So if the current downturn mirrors the Great Recession, Social Security’s depletion date would move up by six years, to 2029. Alicia Munnell — she’s director of the Center for Retirement Research at Boston College — she calculates that if the recession causes payroll taxes to drop by 20%, for two years, the depletion date would move up by two years. So if you add in payroll tax cuts to the pandemic recession, it’s not good news for Social Security.
Brancaccio: And it’s also impossible to predict just how deep this pandemic recession is going to be, which will play out in these figures, right?
Farrell: Exactly. I mean, these are projections. But here’s what I take away from this: Reducing payroll taxes at this time is only going to undermine Social Security finances, and too many older Americans rely on their Social Security benefits to pay the bills.
COVID-19 Economy FAQs
What does the unemployment picture look like?
It depends on where you live. The national unemployment rate has fallen from nearly 15% in April down to 8.4% percent last month. That number, however, masks some big differences in how states are recovering from the huge job losses resulting from the pandemic. Nevada, Hawaii, California and New York have unemployment rates ranging from 11% to more than 13%. Unemployment rates in Idaho, Nebraska, South Dakota and Vermont have now fallen below 5%.
Will it work to fine people who refuse to wear a mask?
Travelers in the New York City transit system are subject to $50 fines for not wearing masks. It’s one of many jurisdictions imposing financial penalties: It’s $220 in Singapore, $130 in the United Kingdom and a whopping $400 in Glendale, California. And losses loom larger than gains, behavioral scientists say. So that principle suggests that for policymakers trying to nudge people’s public behavior, it may be better to take away than to give.
How are restaurants recovering?
Nearly 100,000 restaurants are closed either permanently or for the long term — nearly 1 in 6, according to a new survey by the National Restaurant Association. Almost 4.5 million jobs still haven’t come back. Some restaurants have been able to get by on innovation, focusing on delivery, selling meal or cocktail kits, dining outside — though that option that will disappear in northern states as temperatures fall. But however you slice it, one analyst said, the United States will end the year with fewer restaurants than it began with. And it’s the larger chains that are more likely to survive.
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