Bulletin
Investor Alert

New York Markets After Hours

Aug. 12, 2020, 1:49 p.m. EDT

Social Security could be vulnerable under President Trump’s plan for payroll taxes

The executive order deferred payroll taxes until Dec. 31

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

By Alessandra Malito, MarketWatch


AFP via Getty Images
President Trump signed an executive order on Saturday that would allow employers to defer their employees’ payroll taxes until Dec. 31.

President Trump’s executive order to defer payroll taxes may not hurt Social Security — that is, if everything goes perfectly right, everyone pays back the money they owe and no plans change whatsoever.

That may not happen, some economists say.

As it stands, the executive order the president signed on Saturday says employers will be allowed to defer employees’ payroll taxes until Dec. 31 if they earned $104,000 or less. In a press conference Saturday night , the president said the order will be retroactively effective, beginning Aug. 1. Employees therefore may see extra money in their paychecks — money which would normally be paid toward Social Security. (Employers have the option to ignore this order and continue withholding taxes as is, as they are ultimately responsible for their employees’ share.)

See: Paul Krugman: Trump’s payroll tax cut is ‘the hydroxychloroquine of economic policy’

But because it’s a deferral — not a cut — those taxes will still be owed eventually. This could be good news for Social Security, since the money will still be paid into the trust funds (albeit delayed) and bad news for Americans who planned to keep the “bonus” money from their paychecks to spend or pay down debts. When they would have to pay back the money is unclear — it could be at the end of the year when the executive order expires, or during tax time next year. Employers’ share of the payroll tax was deferred during the CARES Act.

“That means your tax liability accrues this calendar year and you owe all of that in a lump sum,” said Kathleen Romig, senior policy analyst at the Center on Budget and Policy Priorities, a progressive think tank. “That is going to be a very unpleasant surprise.”

As a deferral, and when all of the money is replaced, Social Security will not be substantially impacted. It may lose some of the interest it would have generated over the next couple of months, but it will still have the money it was initially owed, Romig said.

Social Security will, however, be impacted if anything deviates from this current plan. Employees will need to have the money ready to pay back and employers will need all the logistics figured out for their payroll and paperwork — assuming they’re still in business.

“The big question is will they recoup all of that?” Romig said. Businesses are defaulting because of the pandemic and Americans may need to use the money they receive from this deferral if they’re living paycheck to paycheck (as many people were even before the crisis began).

Also see: Trump’s payroll-tax executive order could boost the stock market

There’s also a good chance the president will persuade Congress to shift this deferral into a full tax cut, said Andrew Biggs, a resident scholar at the American Enterprise Institute, a conservative think tank. If that were to happen, the program could lose roughly $150 billion from lost funding between now and Dec. 31, he estimated. Congress would likely vote to back-pay the trust fund with the general revenue, just as it had done after the financial crisis. President Obama had a payroll-tax holiday in 2011 and 2012 in response to the Great Recession. The cut was 2% for two years, and would have cost the equivalent of $300 billion to Social Security in today’s dollars. Congress paid back the trust funds with general revenue.

“The solvency date — that’s something politicians are very sensitive to,” Biggs said. “The issue is if this is a true payroll tax cut for workers or just a deferral — and that we don’t really know right now.”

President Trump said over the weekend if he were reelected he would look into making payroll tax cuts permanent, but he alone does not have the authority to do that, Romig said. Congress has the authority to make changes to the tax laws, and many politicians for both the Democrats and Republicans have said they do not support a permanent payroll tax cut.

“That’s why this is just deferred,” she said. “He doesn’t have the power to make up tax rules.”

Alessandra Malito is a retirement reporter based in New York. You can follow her on Twitter @malito_ali.

This Story has 0 Comments
Be the first to comment
More News In
Retirement

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.