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A Second Stimulus Package Will Almost Certainly Hurt Social Security for This Reason
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A Second Stimulus Package Will Almost Certainly Hurt Social Security for This Reason

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For months, lawmakers have been debating what a second COVID-19 relief package should look like. The first relief package, the CARES Act, was put into place quickly, and it allowed for key benefits like boosted unemployment and direct stimulus checks of up to $1,200 per eligible adult recipient. But lawmakers have been slower to act on a second relief deal, largely because there's been a question as to whether boosted unemployment and additional stimulus checks are actually necessary.

At this stage of the game, though, it's clear that some type of additional relief is in order. The COVID-19 crisis has not improved during the warmer weather months, as many hoped it would. If anything, it's gotten worse, with record numbers of daily cases being logged in July. As such, lawmakers will be reconvening in the Senate to hammer out a second stimulus package. But if President Trump gets his way, that package will include one key feature that might benefit workers and employers in the short term, but hurt Social Security in the long term.

The problem with payroll tax cuts

President Trump has made it clear that he wants some type of payroll tax break to be included in the next stimulus deal. Right now, workers are on the hook for a 12.4% payroll tax for Social Security purposes on their first $137,700 of income. For salaried workers, that tax is split evenly between employee and employer. Self-employed individuals, meanwhile, pay that entire 12.4%.

If the next stimulus package includes a payroll tax cut of any sort, it will help working Americans retain more of their earnings up front, and that's an important thing right now, what with so many who are struggling. It will also constitute a fair amount of savings on the employer side, which could actually help some companies prevent layoffs -- and that's equally crucial at a time when the unemployment rate could skyrocket.

But while these tax cuts make sense to some degree given the ongoing crisis, they're really bad news for Social Security, since the program gets the bulk of its funding from payroll tax revenue. Right now, Social Security's Trustees project that the program will have a funding shortfall in the coming years due to baby boomers existing the workforce in short order and not enough workers coming in to replace them. As such, Social Security will have to tap its trust funds to keep up with scheduled benefits, but once those funds run dry, benefit cuts may be on the table. If an extended payroll tax break is approved, it could be disastrous for Social Security and ultimately push up the date at which the program's trust funds are depleted.

Keep in mind that a payroll tax break would also add insult to injury. Millions of Americans have lost their jobs in the wake of COVID-19, which means Social Security has seen less payroll tax revenue than usual over the past few months. If unemployment climbs in the coming months, which may be the case if cases continue to surge and stay-at-home orders are implemented, then Social Security's future will only get bleaker by the week -- and payroll tax cuts will only make an existing problem even worse.

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