With the coronavirus outbreak threatening to grind productivity to a halt, there’s little doubt that the U.S. economy will enter a recession in 2020.
President Donald Trump might not admit the real reasons publicly, but he’s desperate for a payroll tax cut because he believes it will shorten the recession, accelerate the recovery, and increase his reelection chances in November.
No matter what you believe about the relationship between tax cuts and economic growth, it should be obvious that suspending payroll taxes – which directly fund Social Security and Medicare – is a terrible way to address the coronavirus outbreak.
This strategy won’t help the people most vulnerable to COVID-19. But by attacking the funding source for Social Security and Medicare, it could put their livelihood at an even greater risk.
Scientists still harbor many questions about the novel coronavirus outbreak, but one thing is clear: The elderly and people with underlying health conditions are the most vulnerable to the disease that it causes – COVID-19.
According to this University of Bern study (which has not yet been peer-reviewed), the COVID-19 fatality rate rises dramatically as people approach the age when they can access Social Security and Medicare benefits.
Here are the fatality rates for retirement-age individuals:
And here they are for working-age individuals:
The study relies on Chinese case data, and fatality rates will inevitably be different in the United States. But there’s no dispute that seniors face the greatest threat from the coronavirus outbreak.
That’s what makes Trump’s payroll tax cut plan particularly dangerous.
The vast majority of working-age Americans that will benefit from a payroll tax cut don’t face a serious health threat from COVID-19. Their greatest threat is economic – job loss – in which case a payroll tax cut wouldn’t help them anyway.
And while seniors who still draw a paycheck may benefit from a payroll tax cut, retirees won’t. The reason is simple: They don’t pay payroll taxes on Social Security benefits and retirement income. (High-income retirees may be subject to a modest 0.9% Medicare surtax.)
So the payroll tax cut won’t help retirees. But it will hurt them in the long run.
Social Security already faces a projected funding shortfall in 2020 without a payroll tax holiday, according to the nonpartisan Congressional Research Service [PDF]. That means that payouts will exceed income (tax revenue plus interest on asset reserves), and the program must begin drawing on its $2.9 trillion in asset fund reserves.
Those reserves won’t keep Social Security solvent for long. The latest Social Security Administration report warns that the program’s trust fund reserves have a projected depletion date of 2035.
Once those trust fund reserves run dry, the government must either slash benefits or hike taxes to keep the programs solvent. Neither of those options will be particularly palatable to voters, so Congress will likely supplement them with increased deficit spending.
Suspending the payroll tax only threatens to accelerate those insolvencies. That’s true even if Congress foots the bill for this coronavirus stimulus plan out of its general fund (which it likely will).
As the Tax Foundation warns, the danger is that this precedent goes both ways:
On top of the mixed economic effects, payroll tax holidays weaken the relationship between Social Security benefits and payroll tax revenue. This may incentivize policymakers to use payroll tax revenue for purposes other than Social Security in the future, undermining the foundation of the social insurance program.
If Congress compensates for payroll tax shortfalls now, what’s to stop them from redirecting payroll tax revenues away from Social Security and Medicare in the future – rendering them permanently insolvent?
With the U.S. budget deficit already projected to top $1 trillion in 2020, policymakers could begin that debate sooner than you think.
Last modified: June 24, 2020 1:03 AM UTC