The executive order of President Donald Trump to postpone, and possibly forgive, tax cuts could leave Social Security and Medicare on even shakier ground.
© Alex Brandon / AP
President Donald Trump looks at his phone during a round table with executives about reopening America’s small businesses, in the White House’s State Dining Room, Thursday, June 18, 2020, in Washington. (AP Photo / Alex Brandon)
The finances of the law programs have long been troubled. And the crunch of coronavirus-induced layoffs has only deepened the problem by reducing the amount of income tax payments in their trust funds.
A large fan of tax cuts, Trump on Saturday signed an executive order deferring the employee share of the payroll tax – 6.2% for Social Security and 1.45% for Medicare – for workers earning less than $ 100,000 per year through the rest of 2020.
If he is re-elected, Trump said, he plans to forgive the taxes and make permanent cuts to the state tax.
“I will make them all permanent,” he said.
Otherwise, workers would probably have to pay taxes at the end of the year.
Trump tried to take up the controversial measure – which will do nothing to help the unemployed – in the latest coronavirus relief package currently missing on Capitol Hill. Republican senators have refused to do so, so the president is taking matters into his own executive hands, saying it has broad support.
“Very importantly, I am also looking at a term limited suspension of the tax service,” he said at a news conference on Wednesday. “Something that has great support from many, many sides, especially our top economists.”
It is unclear exactly how the president would cut the tax bill permanently. Only Congress has the power to actually change the levies, and when it did so under former President Barack Obama, it removed the Social Security trust fund from the general revenue.
“A payroll tax vacation on top of a pandemic will have a significant negative effect,” Richard Prisinzano, director of policy analysis for the Penn Wharton Budget Model, said Thursday. “This just picks up.”
Social Security and Medicare are in trouble
The financial crisis with the direction programs is not a far-reaching problem that the grandchildren of retirees have to deal with.
If this economic downturn is as bad as the Great Recession a decade ago, then Social Security compensation funds could run out of money in 2029, according to the Bipartisan Policy Center. After that, beneficiaries could see a 31% cut in pension payments.
The trustees of the program had earlier this year projected that the trust funds will be withdrawn in 2035, but that does not take into account the coronavirus pandemic.
It would be the first time the rough date of insolvency had been within a decade since the crisis of the 1980s, causing several changes, including increasing the retirement age, said Shai Akabas, director of the Center for Economic Policy.
“An already urgent situation has become even more urgent,” Akabas said, noting the sharp drop in income before tax payments. “We expect this trend to continue for many years to come as it takes the labor market to recover.”
Offers hurt the law programs
The fiscal health of Social Security and Medicare has been hit hard by the steep drop in employment. There were 13 million fewer people working in July than in February. Those people and their former employers no longer bear the 12.4% combined Social Security tax and the total tax rate of 2.9% for Medicare. Those who earn more than $ 200,000, or $ 250,000 if they are married, pay an additional 0.9% Medicare tax.
Last year, between August and December, about $ 500 billion went into Social Security and Medicare reimbursement funds, according to the Center for American Progress, a left-leaning think tank.
The huge loss of jobs means that the trust funds of the two justice programs will be drained years earlier than predicted, say several think tanks.
The projection depends entirely on when the economy is expected to recover. If the economy recovers rapidly, under a V-shaped recovery, the depletion date would be 2034, according to the Penn Wharton Budget Model. But a slower U-shaped recovery would accelerate that by two years until 2032.
A full recovery in 2021 would only separate one year from the life of the trust funds, according to a recent presentation by actuaries from Social Security Administration. But if unemployment continues into next year or if there is a permanent decline in economic activity, the negative effect could be “substantially greater.”
The situation is even more costly for the Medicare trust fund, whose trustees, who projected earlier this year, would earn money by 2026, not taking into account the pandemic.
If employment and tax revenues follow the same pattern as the Great Recession and its aftermath, the hit to the Medicare trust fund could be $ 175 billion between 2020 and 2023, according to an estimate by experts at the American Enterprise Institute, a law-abiding think tank. That would speed up the depletion date by three years.
Using employment projections by the Congressional Budget Bureau yields the same estimate, according to David Shulkin, the former secretary of veterans affairs and a health policy supporter at the University of Pennsylvania.
The unemployment rate was 3.5% in February, just before the coronavirus hit the economy. The CBO estimated earlier this year that the annual unemployment rate would be 11.5% for 2020 and 9.3% for 2021. (The unemployment rate in July was 10.2%.)
“What we can not deliver is yet another crisis – a funding crisis for health care – in the time of a pandemic,” Shulkin said. “If anything, we should take action to increase Medicare’s solvency and not offer solutions that make that problem much more critical.”
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