As Congress debates over the next Coronavirus Stimulus Package, many are left wondering how new legislation could affect older adults. While direct payments and unemployment benefits could provide some temporary relief, other proposals could pose a risk to certain federally-funded programs. More specifically, cuts to the payroll tax, which funds Medicare and Social Security, could impact the retirement benefits of millions of Americans. Is a payroll tax cut likely to pass in Congress? What kind of payroll tax cut is being proposed? And finally, how will payroll tax cuts affect your Medicare and Social Security? We will answer all of these questions and more, but first, let’s define the payroll tax:
Payroll taxes are the primary form of income tax that American workers must pay. For those who work for an employer, a certain amount is withheld from their paycheck by their employer and paid to the Internal Revenue Service (IRS). This is known as the payroll tax. Self-employed individuals pay a similar tax via the Self-Employment Tax.
Once the IRS receives payroll taxes, these funds fall into three categories: Federal Income, Social Security, and Medicare. Thus, payroll taxes are an essential part of Social Security and Medicare funding. Without them, the government would either need to end these programs or find funding elsewhere.
The White House administration and certain members of Congress are actively pushing for a payroll tax cut in the next stimulus bill. So, what would this do? In essence, it would put a pause on payroll tax collection, providing a temporary boost to workers’ income. However, it would not completely eliminate the payroll tax.
Democrats and even many Republicans in Congress oppose a payroll tax cut, even if it is just a temporary measure. One argument against the proposal is that it may leave workers with a bigger tax bill at the end of the year or whenever the moratorium on payroll tax collection ends. It also does nothing to help the millions of Americans who are unemployed as a result of COVID-19. Moreover, the payroll tax cut would temporarily suspend funding for Social Security and Medicare. Nonetheless, the White House has indicated that President Trump will not sign any more Coronavirus legislation unless it includes the cut.
Hopefully, the payroll tax cuts won’t affect Medicare or Social Security. If the tax cuts are passed and signed into law, they will temporarily reduce funding for both programs. In the past, when Congress passed payroll tax cuts, funds were diverted from the Treasury Department to fund Medicare and Social Security. In all likelihood, the same will be done this time. However, this will add substantially to a national deficit that has already surpassed $2.8 trillion.
However, it’s always smart to consider the worst-case-scenario. If the payroll tax cut passes and the federal government does not have the funds to divert to Medicare and Social Security, you could experience reduced benefits until funding is restored. However, given the state of the economy during the COVID-19 crisis and the number of Americans who rely on both programs, this outcome is unlikely.
Thankfully, Time for 65 is here to help in this complicated time. Our licensed insurance agents have the expertise and knowledge to help you navigate any changes in Medicare and retirement benefits. 2020 has already been a difficult year, but we are here to make things a little bit easier.
Coronavirus has put the country in a complicated situation. Millions of people are out of work as the economy struggles to recover from such an unprecedented crisis. While a payroll tax may offer temporary help for some workers, it could also put Medicare and Social Security funding in jeopardy. Fortunately, both federal and state governments prioritize the funding of these programs, making any reduction in benefits highly improbable.
If you’d like to learn more about the payroll tax cuts and your Medicare coverage options, feel free to fill out the form or give us a call anytime. Our licensed insurance agents are focused on giving you the information you need, with zero pressure to enroll in a plan.