Trump implementing a payroll tax cut through executive order would blow a hole in Social Security and Medicare's finances, economists warn

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Trump implementing a payroll tax cut through executive order would blow a hole in Social Security and Medicare's finances, economists warn
President Donald Trump speaks during a meeting with Arizona Gov. Doug Ducey in the Oval Office of the White House in Washington, Wednesday, Aug. 5, 2020.Andrew Harnik/Reuters
  • Economists are warning that if Trump enacts a payroll tax cut, it would weaken the shaky finances of the Social Security and Medicare trust funds.
  • It's unclear whether the president would attempt to replace the funding as Congress did when it deferred employers' Social Security tax payments earlier this year.
  • "It's like borrowing money from the Social Security and Medicare trust funds to give to employers just to hold," said Seth Hanlon, a tax expert.

A group of economists at a think tank are warning that if President Donald Trump moves forward with a payroll tax cut through an executive order, the step would weaken the funding mechanisms for Social Security and Medicare.

Over the past week, the president has threatened to circumvent Congress and sign an executive order to enact a payroll tax cut. The tax refers to the 15.3% levy on wages imposed by the federal government, and evenly divided between employers and workers. Most of it funds Social Security, but it also helps finance Medicare.

But experts say the step would further erode the shaky finances of both safety-net programs by yanking a critical source of funding.

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"Trump's scheme would weaken the Social Security and Medicare trust funds by diverting the revenue from the employee portion of Social Security and Medicare taxes, and potentially the employer's share of Medicare taxes, from the programs' trust funds," the memo from the Center for American Progress said.

Earlier this year, Congress deferred the employer-portion of the Social Security tax (6.2%) through 2022 under the CARES Act. But they replaced the lost money with an infusion of general Treasury funds.

Trump, the memo said, lacks the authority to appropriate funds, which is Congress's purview.

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Many economists say that implementing a payroll tax cut through an executive order wouldn't lead to a bump in wages for most workers, since the executive branch can only defer tax payments up to a year and not forgive them. Wiping out the payment requires Congress to act.

Legally, employers remain on the hook for any delayed payment. Firms would likely keep the money since they fear being saddled with a hefty tax bill if Congress didn't move to forgive it.

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"It's like borrowing money from the Social Security and Medicare trust funds to give to employers just to hold," Seth Hanlon, a tax expert and senior fellow at the left-leaning Center for American Progress, told Business Insider. "They're just gonna hold the withheld taxes because they'd have to pay it eventually."

The massive wave of layoffs due to the pandemic has weakened the programs' finances by slashing the amount of payroll tax revenue streaming into their trust funds. Around 13 million fewer people are employed in July compared to February.

The Bipartisan Policy Center projects that if the economic damage is similar to that of the Great Recession a decade ago, the Social Security trust funds could be depleted in 2029. That could prompt a 31% cut in retirement benefits, the organization said.

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Before the pandemic, that program's trustees estimated the program's funding would lapse in 2035 without taking the coronavirus outbreak into account.

The Medicare trust fund is in worse shape. Its trustees said the program would run out of money in 2026 — also without accounting for the pandemic.

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