Over the course of the debacle of the year known as 2020, the United States government has made attempts to bolster a flagging economy and assist its citizens. Thus far the only assistance has come through the CARES Act earlier this year with all other federal level attempts stalling out due to politics. This has set the stage for President Donald Trump to bring his own ideas onto the playing field.
One of President Trump's latest ideas is a dangerous idea. He is considering a payroll tax holiday. To boost economic action during the pandemic, he is proposing, either by law or by executive action, that we stop collecting payroll taxes until the end of the year.
While the typical reaction to a tax being suspended is joy, this move is dangerous for our elderly and poor. Why? Payroll taxes are those deductions that show up on your paycheck's stub. The very thing that is keeping the Soical Security program going as well as the Medicare. To fund Social Security, you get 6.2% deducted from your check. Your employer then has to match that amount. Medicare primarily provides health insurance for those who are 65 and older. 1.45% of your check goes to fund Medicare, and your employer matches that amount.
Currently, the Social Security Trust Fund is already on a slow road to becoming insolvent. Once insolvent, it will only be able to pay out in benefits what comes in from taxes. That will mean a dramatic cut forced on future retirees. If we do nothing, that will come in 2037. If we cut current benefits (another bad idea), we can push that date back a long ways. If we slightly increase the tax rates, we can push that back by many years. If we don't cut benefits and don't increase the rates but eliminate the cap where money earned above a certain amount is free from payroll taxes, Social Security might be solvent forever. That would only effect people who make over $137,000 a year.
However, if President Trump goes ahead with his payroll tax holiday and makes it permanent, Social Security would become insolvent by 2026. Then new funding would have to come from somewhere, and benefits would have to be slashed.
As first proposed, this payroll tax holiday would merely be a short reprieve. Businesses would stop taking the deductions from your paycheck, but they would then double in the new year until you've paid everything back. Since it will soon be a tax owed, that won't help jumpstart the economy. If the back taxes are going to eventually be forgiven and people trust that all will be forgiven, then it will do a little bit to boost consumer spending but also do significant harm to the trust fund that is already struggling.
Medicare is in even worse shape. That trust fund is only five years away from falling short of expenses. Leaving our elderly without health insurance is totally unacceptable. Cutting their coverage to make expenses meet declining revenue is also unacceptable.
You may be thinking that our parents paid in for our grandparents, we need to pay in for our parents and, hopefully, our children will pay in for us when we retire. That's not the way the system was set up to run. The money deducted from your check is supposed to go into a huge trust fund. Then, when you retire, it's your money that is funding your Social Security benefits and Medicare health insurance. The system has been broken for a long time, but this holiday idea will compound the ongoing damage.
Whether permanent or temporary or repaid, this payroll tax holiday is a dangerous idea. Forcing our retirees to bear cuts to their Social Security benefits and cuts to their Medicare health insurance in an attempt to boost the economy will be cruel and probably ineffective. This is not a bad idea. This is a dangerously bad holiday idea.