Reports alleging the Trump administration was mulling a payroll tax holiday to ward off recession fears were walked back—kind of—by President Trump in an impromptu press conference yesterday on the south lawn of the White House.
“I’m not looking at a tax cut now. We don’t need it, we have a strong economy,” the President said.
There were no details released on how much payroll taxes would be cut, or for how long, under the proposal allegedly considered in the White House. On Tuesday, President Trump said, “I’ve been thinking about payroll taxes for a long time.”
Payroll taxes, of course, fund Social Security and Medicare. Both programs are facing the impending insolvency of their trust funds.
In 2010, as part of a larger deal with Congressional Republicans that extended some of the tax cuts passed in the Bush administration, President Obama signed into law a temporary payroll tax cut of 2 percent on the 6.2 percent workers pay into their Social Security tax. It was ultimately extended through 2012.
A White House press release said the cuts amounted to an extra $1,000 in earnings for a typical family earning $50,000 a year.
The cuts to Social Security’s coffers were ultimately paid back from money in the federal government’s general fund.
Analysis from the Committee for a Responsible Federal Budget, a bipartisan think tank that advocates for sound fiscal policy, shows the same 2 percent payroll holiday enacted in 2011 would cost nearly $300 billion, before interest, if enacted for two years in 2020. CRFB says a payroll holiday would cost between $70 billion and $75 billion every year for every percentage point of cuts.
“This is like déjà vu all over again,” said Chad Parks, founder and CEO of Ubiquity Retirement and Savings, a provider of retirement plans to micro and small businesses.
“I think the proposal is really misguided,” added Parks in an interview. “It’s sold as a way to stimulate the economy, but all it does is shortchange the future.”
The Social Security Administration projects the program’s OASI and disability insurance trust funds will be depleted in 2035. Under current law, beneficiaries would see a 23 percent across-the-board cut to scheduled benefits.
By 2020, the program will start paying more in benefits than it takes in revenue from payroll taxes, taxes on benefits, and interest earned on investments.
The Congressional Budget Office predicts Social Security’s reserves will run out in 2032 under current law, which would lead to a nearly 30 percent reduction in benefits by 2049.
Parks thinks the potential stimulative affects of a payroll tax holiday would be negligible.
“It’s one of the oldest political tricks in the playbook,” said Parks, who describes himself as politically neutral. “All the holiday would do is take money out of your future savings.”
In the 401(k) world, an analogy to the payroll tax holiday would be allowing savers to tap assets tax free. That idea would be widely panned by industry, thinks Parks, given the ongoing struggle to prevent leakage from retirement savings plans.
Some conservative media outlets have been critical of the idea of a payroll tax holiday.
While the idea appears to have been shelved by the White House for the time being, it could re-emerge if looming recession fears accelerate in front of the 2020 election.
“The White House is obviously concerned about that,” said Parks. “A good economy is what they plan to run on.”
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