The economic fallout from COVID-19 is depriving Social Security and Medicare of much-needed revenue, and now a series of executive orders might add to their financial burdens … or not. Let’s discuss.
In August, President Trump issued an executive order that allows employees to defer paying their share of Social Security payroll taxes from September 1 until December 31. These taxes help fund our entitlement programs. So what does this delay in revenue mean for Medicare and Social Security? The answer depends on a few factors and can be broken down into five scenarios.
SCENARIO 1: Most employers decide they don’t want to offer a delay to their employees.
The biggest unknown is how many employers will decide to defer payroll taxes for their employees. If every employer does it, then the shortfall in payroll tax revenue would be substantial – close to the numbers in Scenario 3 below. But if only a few employers defer, then the executive order won’t have much of an effect on either Social Security or Medicare’s finances.
SCENARIO 2: Workers defer paying payroll taxes now, but then repay them in early 2021.
In this scenario, a substantial number of employers let their employees take advantage of the tax relief offered by the executive order. Workers could delay paying their payroll taxes from September through December, but they would owe the full amount to the government in January 2021.
So, let’s say you make $50,000 a year. If you delayed your payroll taxes, you’d get a bigger paycheck now, but next year you would owe the federal government $1,023.
Under this scenario, the impact on Social Security and Medicare would be minimal. The trust funds for both programs wouldn’t receive income from employee payroll taxes for the last four months of 2020, but those taxes would be paid in full in January. Since the trust funds earn interest on their balances, they might lose a little money by having relatively smaller balances for a few months, but it wouldn’t be enough to substantially hurt the programs.
SCENARIO 3: Congress decides employees don’t have to pay their deferred taxes. But Congress doesn’t replace the missing funding for Social Security.
This scenario is a doozy. Employees would get tax relief through the end of the year, but Social Security’s finances would be in much worse shape.
Social Security alone takes in over $900 billion a year in payroll tax revenue. So, if Congress decides that employees who delayed these taxes don’t have to pay them at all, then the program could see a shortfall of about $150 billion.
SCENARIO 4: Congress forgives the unpaid payroll taxes and diverts funds to cover the lost revenue for Social Security.
This is the costliest scenario, since employees would get tax relief and the trust funds would get reimbursed for the lost revenue.
Earlier this year in the CARES Act, Congress set a precedent of covering any shortfalls in entitlement program funding. Congress simply used general-fund revenue to plug the hole and could do the same here.
SCENARIO 5: Congress eliminates payroll taxes altogether.
At a press briefing on August 12, President Trump floated another idea: If re-elected, he would “terminate the payroll tax” and pay for Social Security entirely out of general-fund revenues.
First, it’s worth noting that any changes to the payroll tax would need Congress’s approval. So this proposal would face considerable obstacles and is unlikely to become law. But if it did, this would be a huge change.
Without the payroll tax, the Social Security trust funds would run out of money in less than three years. And as currently written, the law says that if there’s no payroll-tax revenue coming in when the trust funds go bankrupt, all current retirees will stop receiving benefits altogether.
Congress could step in and prevent this situation by plugging the gap with general-fund revenue. That wouldn’t be totally unprecedented; Medicare is already largely funded through general-fund revenues (in 2019, payroll taxes covered only 35 percent of Medicare’s total annual spending). But funding all entitlement programs this way would result in over a trillion dollars a year in new spending (rising to two trillion by 2031) with no dedicated taxes to cover the shortfall.
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