What happens when the payroll tax is “suspended?”

Janet Arrowood

According to several reports, President Donald Trump ordered the Department of the Treasury to stop withholding payroll taxes for the balance of the year from federal employee checks beginning mid-September and running through the end of 2020. 

Perhaps the scariest aspect of this order is its 100 percent application to military enlisted members. Officers can opt out, but enlisted service members can’t. The youngest, most vulnerable and grossly underpaid members of the military will see an increase of around 6.4 percent in their take-home pay for the rest of the year. But the tax man will return in force in January, collecting the “suspended” payroll tax plus the currently due payroll tax until the entire amount is withheld. These soldiers will see around 12.8 percent of the amount they received in December simply vanish. 

That will be a nightmare for hundreds of thousands of young men and women who volunteered to serve their country. Many of those who aren’t yet on food stamps will have to consider that option. As a former military officer who helped young soldiers get food stamps, I know how demeaned and helpless they’re going to feel.

If this “suspension” continues through 2021, apparently Social Security Disability Income (SSDI) checks will end after 2021. Social Security retirement checks would follow at the end of 2023 when the trust fund empties. Congress, it seems, could only enact legislation to override a threatened Trump veto if it had a veto-proof majority — something it doesn’t have in 2020 and likely won’t have in 2021. The president can, it seems, unilaterally continue the payroll tax “suspension” as long as he’s in office without oversight or input from our elected representatives.

What happens as the “suspension” drags on?

First, most people will likely simply spend the additional money they see in their checks, assuming their employers don’t withhold the money and escrow it. The direction from the federal government for federal employees is to simply give the money to those federal employees who contribute to Social Security. This means that come January 2021, unless the “suspension” is extended or made permanent, the money that wasn’t withheld will be clawed back from about 1 million Federal employees and some to-be-determined number of business employees. 

Imagine getting used to another 5 percent or more in your paycheck for four months only to have your employer start taking out double that amount for some period (currently about four months) starting in January. That’s like seeing a 15 percent drop in your salary since you got used to having the extra 5 percent (and an even higher percentage of your take-home pay).

What if the “suspension” continues past Dec. 31, 2020?

If, as projected, the SSDI fund runs dry at the end of 2021, hundreds of thousands (probably millions) of totally or partially disabled workers and dependents (disabled children and others), will suddenly have no SSDI income. No checks automatically deposited. No way to pay the mortgage or rent, buy food, pay utilities and on and on. The resulting financial situation will make the stay at home directions for handling the COVID-19 pandemic seem tame.

Then there are the tens of millions of seniors who rely on Social Security retirement income benefits. They worked for decades and contributed to the trust fund, but could discover after December 2023 there’ll be no more monthly checks. Social Security benefits were never intended to constitute a lone source of retirement income. But for many people, those benefits are all they have.

What happens if payroll tax collections don’t restart in January 2021 with 100 percent claw back of the “suspended” amounts? Many things, none of them good.

Many retired people could have to sell their homes for the cash to live. That will likely pull down residential real estate pries since there’ll be a glut and younger generations might not be able to afford these houses. Then all these newly houseless seniors will enter the rental market, competing with younger people and driving up rents.

Next, many seniors will have to find some sort of work to replace the $1,000 to $2,000 (approximate monthly average) of lost Social Security income. They’ll compete with younger people for jobs that disappeared courtesy of COVID-19 and resulting high unemployment.

As rents rise, more seniors will be forced out of rental properties and into multi-generational living situations. They’ll have to move in with their adult children, nieces, nephews, aged parents or other lucky souls. The disruption to families will be horrendous since these moves likely will be permanent. It’s doubtful seniors in this living situation will be able to afford long-term care in a facility, so they’ll further increase the burden on their families.

Working people will likely not save much, if any, of their “windfall,” even though they’ll now have to fund even more of their retirements themselves. Consider how few people stay at one employer long enough to qualify for retirement benefits, fully fund their 401(k)s or similar plans or contribute to IRAs. Where are the resources going to come from? It’s relatively painless to give up 5 percent to 8 percent of income now in exchange for a significant guaranteed income later.

The potential crisis illustrates the snowball effect. Someone makes a 3-inch diameter snowball and sends it rolling down a 2-mile long snowy slope. By the time the ball reaches the bottom of the hill, it’s become a half-mile wide avalanche that takes out an entire village.

The decision to “suspend” payroll taxes is probably one of the top 10, or even top three, worst executive orders to come from this president. America can’t afford four more years. We might not even survive four more months. And what this will do to our wonderful military enlisted personnel is beyond the pale.