Beginning next year, for the first time in 39 years, Social Security is projected to dispense more money than it takes in, which means that the money being collected by the program will soon not be enough to cover the benefits being paid out. Does this mean that Social Security is going bankrupt?
How the Program Came to Be and How it Works
In 1935, after decades of American workers advocated for a social insurance program that could help support retired workers, President Franklin D. Roosevelt signed the Social Security Act into law. Social Security taxes were first collected in 1937 with payments to retired workers beginning in 1940.
A dedicated tax on earnings funds the Social Security program, and the collected money is disbursed as retirement benefits for retirees in the form of a monthly check. How much money a retired worker gets from the program is measured in “work credits”, which are based on total income earned during their career. The program also supplies survivor benefits in many cases to widowed spouses.
What Went Wrong?
Social Security was signed into law over 80 years ago, and there have been significant shifts in demographics since then. The baby-boom generation is retiring, tipping the scale on the worker-to-beneficiary ratio, but other contributing factors include:
growing income inequality
sizable decline in birth rates
legal immigration, which has been cut in half over the last two decades
Longer life expectancy as a result of modern medicine, which means people are collecting checks for more years than earlier generations
Is Bankruptcy in the Future for Social Security?
Rumors of the program’s impending bankruptcy have been circulating for years, and some people believe that Social Security funds are going to run out, leaving the workers who are paying into the system now without benefits. This is unlikely to be the case, but lawmakers rightfully continue to discuss proposals to Social Security legislation that would protect the program in coming years. While GOP lawmakers have expressed a desire to raise the minimum age at which you can begin to receive payments, Democrat lawmakers have proposed increasing the payroll tax that pays for Social Security. Neither plan is perfect. The GOP proposal would take years before any savings are realized, and the democrats’ plan to tax the rich would only put the program on borrowed time until it’s back in the same position. A bipartisan plan is needed for the future of Social Security, but how long it will take lawmakers to get there remains to be seen.
On Aug. 28, 2020, as part of COVID-19 relief, President Trump issued a presidential memorandum allowing employers to suspend withholding and paying to the IRS eligible employees’ Social Security payroll taxes from September 1, 2020 through December 31, 2020. The IRS then issued guidance on the payroll tax deferral in Notice 2020-65, but some questions still remain, and additional guidance in anticipated. Here’s what we know now.
Notice 2020-65 Provides Basic Guidance
For those implementing the program, the Notice provides barebones components of the payroll tax deferral, which applies to the employee portion of Social Security Tax.
For employees earning less than $4,000 in a bi-weekly pay period, employers would defer withholding/depositing employee share of social security tax on wages earned for payroll periods on or after September 1, 2020.
For employees whose wages fluctuate, the deferral is applicable to wages paid in any bi-weekly pay period during the dates specified in which the employee earns less than $4,000, regardless of wages or compensation paid to the employee for any other pay period. Therefore, the employer may defer to collect the tax in a pay period where the employee earns less than $4,000 but be required to collect it for another pay period where the employee earns more than $4,000.
Though Treasury Secretary Mnuchin announced previously that the deferral program would be optional, the Notice does not specifically address whether it is mandatory or optional.
Departing Employees
One main reason that employers may not be eager to offer the benefit to employees is due to the absence of guidance regarding the situation of an employee’s termination or otherwise leaving employment ahead of paying the deferred amount. The employer and employee can come up with an arrangement (i.e. deducting the amount owed from the final paycheck), but should an employer fail to collect from the employee, the IRS could go after the employer.
To Defer or Not to Defer?
Given that the motive behind the tax deferral program is to get more money into the pockets of employees now in order to make ends meet due to reduced wages and/or hours, employers may think it worthwhile to extend this option to their employees. An average worker who completely defers Social Security taxes until December 31, 2020 would save just under $800, or about $60 per week. Employees must keep in mind that it is a temporary relief in the form of a deferral, not a tax forgiveness, though the President’s Executive Order does encourage Treasury to look into possible avenues for forgiveness. At best the tax deferral is an opportunity for workers to funnel those funds into an emergency savings account, ensuring that the savings will be on hand should Treasury fail to put forth a path for forgiveness and the taxes are consequently deducted from paychecks next year.
As Congress begins working on a new coronavirus relief bill, the White House looks to target aid more specifically and cap the overall expense of the package at $1 trillion. Here’s what else we know about a second stimulus package.
Direct Stimulus Payment
Another round of stimulus checks could be coming to American households, but the amount is yet to be determined. While early talks of a second stimulus package were largely jobs focused, recent nationwide spikes of confirmed coronavirus cases have some states rolling back their reopening plans. The effect could be further layoffs for American workers and economic hardship for families, which increase the urgency for additional cash payments. However, the amounts and income thresholds could differ from the first round of stimulus checks, which were approved for individuals whose income was no greater than $75,000 and for married couples whose combined income was no greater than $150,000. Payments were phased out for incomes above those thresholds. It remains unclear at this point how Congress will move forward with this.
Changes to Unemployment Benefits
The CARES Act approved a weekly $600 bonus unemployment benefit to workers who’ve been laid off or furloughed as a result of COVID-19. This is in addition to state-provided unemployment benefits. However, this $600 weekly bonus is set to expire at the end of the month. Some lawmakers would like to see it extended while others would like unemployment benefits to be capped at no more than 100% of a worker’s compensation when employed. Though the additional unemployment benefit has proven to be a financial lifeline to workers who were suddenly laid off or furloughed, the risk is that it potentially incentivizes citizens to stay unemployed.
Back to Work Bonuses
Some lawmakers have put forth proposals for return-to-work bonuses. Such legislation could be an alternative to extending the enhanced unemployment bonus. So far talks of this bonus indicate a weekly $450 bonus for a limited time targeted at unemployed workers who return to work.
More Relief for Businesses
The CARES Act introduced the Paycheck Protection Program (PPP), which provided businesses that have been impacted by COVID-19 with forgivable loans. The second stimulus package could include an extension of the PPP, but some lawmakers would like to repurpose its unused funds for other kinds of assistance, which would be more clearly targeted at businesses that need the help. The White House also continues to advocate for tax breaks to promote new hires.
Liability Protection for Employers
The second stimulus package could see liability protections for employers who could possibly face lawsuits related to COVID-19, but any bill that permits sweeping immunity for employers will likely receive pushback from some lawmakers.
State and local aid, infrastructure spending, payroll tax cuts, and a tax credit for domestic travel are further probable points of discussion when Congress returns from recess.
Failure is a very real possibility for small businesses. It’s a reality that will test your resolve as a business owner as well as the durability of your business strategy. When giving up feels like the only option, here are some tips to turn a sinking ship around.
Network
Connect with other business owners, influential people in your industry, and even professional business consultants. The chances are highly likely that you’re not the first business owner to be going through this phase. Be willing to ask questions and be open to new ideas.
Execute A Strategy
Do you have a clear vision of your overall strategy and the bigger picture for your business? If not, consider working with a professional marketing agency or consultant to help develop an effective plan to nurture client relationships and keep customers engaged in the long game, which will translate to consistent sales.
Invest in Employee Trust and Motivation
You wouldn’t have made it this far without significant contribution from your team, but be sure all employees are on the same page. Do they understand your business model and long-term goals? Are their contributions and talents valued? A dedicated and active team will build company morale and translate to better sales, better products, and better output.
Know Your Client Base
Business survival is dependent upon fulfilling customer needs and expectations, so it’s important to always be in tune to the pulse of industry current events, news, products, advertising trends, and overall awareness. Likewise, it’s crucial to keep your ears open to customer engagement, feedback, and satisfaction. Partake in market surveys, meet the customers you’re serving, have one-on-one meetings with clients, and invest in low-cost advertising methods.
Realize the Potential of Your Assets
If you find your business in dire circumstances, relief may come in the form of your company’s assets, which are meant to supply capital for your business. Trading assets might just prove to be the lifeline you need to keep from going under. For example, you can lease out buildings, office space, or machinery for a generous stipend. If at all possible, negotiate a rental or leasing arrangement rather than sell completely. However, if you’re convinced that selling is the right move for you, strive to maintain some proprietary rights in the property.
Go Back to the Drawing Board
Try to determine where things went awry in your business. If you collect data and monitor negative feedback, the trends will give you a clue. Start asking difficult questions about salaries, the amount of staff you’re employing, and compensation packages. What additional cost-cutting actions can you take?
Congress passed the Paycheck Protection Program Flexibility Act (PPPFA) on June 5, 2020, amending several provisions in the original PPP loan program. Along with granting business owners more flexibility and time to spend the PPP loan proceeds, the Act permits funds to be used on a wider-ranging variety of expenses while still allowing for loan forgiveness. Here is how this will affect businesses moving forward with a PPP loan.
Extended Covered Period
Originally, borrowers had 8 weeks from the receipt of loan proceeds to spend funds on forgivable expenditures. Now the covered period specifies 24 weeks after the origination of the loan, or December 31, 2020, whichever is sooner. To qualify for forgiveness, however, borrowers must maintain payroll levels for the full 24-week period. Borrowers do have the option to stick with the 8-week deadline, and they must likewise maintain payroll levels through the full 8 weeks to qualify for the full loan forgiveness amount.
Additional extensions include the timeline for eliminating reductions in workforce and wages, as well as restoring workforce levels and wages to pre-pandemic levels required for loan forgiveness (both extended to December 31, 2020).
Changes to Percentage of Payroll Costs
The PPPFA reduced the payroll expense requirement from 75% to 60%, which means that 40% of the PPP loan funds may now be put towards forgivable non-payroll expenses such as mortgage interest, rent, and utilities. Note that the expenses originally designated as forgivable have not changed.
Changes to Repayment Period
For borrowers whose loans are not forgiven, the PPPFA increases the repayment timeline from two years to five years. The 1% interest rate remains the same.
Changes to Rehiring Requirements
The PPPFA also extends the rehire date to December 31, 2020 and allows for a reduced headcount. Rather than basing loan forgiveness on a borrower’s ability to rehire the same number of employees on payroll as was used to calculate the loan, the PPPFA allows for loan forgiveness amount to be determined by documentation showing that the borrower was (1) not able to rehire former employees and unable to hire similarly qualified employees, or (2) not able to return to pre-pandemic levels of business activity in response to federal guidelines related to COVID-19.
Changes to Payroll Tax Deferment
The CARES Act originally prevented borrowers who received PPP loan funding from deferring additional payroll tax once the lender decided to forgive the loan, but the PPPFA eliminates this restriction, and borrowers can now defer the payroll tax for the period from March 27 to December 31, 2020.
Overall, the PPPFA will ease the burdens of businesses that received PPP loans, but it doesn’t fix everything or answer all the questions, so expect more regulations and changes to the PPP program in the near future.
Since early March, the COVID-19 pandemic has been making a substantial financial impact on millions of people across the country. With 22 million jobless claims in just one month and a slowly moving economy, many homeowners are left wondering if their properties will see a decline in value as workers continue to lose their jobs and minimize personal spending. Spring is traditionally the prime time for buying and selling homes, but thanks to COVID-19, listings have dropped significantly.
What We Already Know
Beginning in March, mortgage rates have fluctuated significantly. They’ve fallen to record lows—the average for a new 30-year fixed-rate mortgage currently falls near 3.33% – and may continue to drop. For those who already own homes, applications to refinance their homes are up almost 168% from March 2019.
Mortgage rates and home values, while related, are two separate entities. History shows us that home prices are likely to fall during recessions, but to what degree is specific to your local market. If available homes in a particular area are already highly sought-after (places like San Francisco, Los Angeles, or Seattle), it is unlikely homeowners will see their property values go down much at all. That said, with such low mortgage rates available, buyers who haven’t suffered from layoffs or unemployment could find their opportunity to purchase a property. If there is still a demand for homes in an area, home prices are likely to remain steady.
Past research from Zillow shows us that during previous pandemics in the US that home prices remained stable with only small declines in home prices. The research also showed that there were fewer real estate transactions and NOT sales happening at a loss.
COVID-19 is already an oddity, and its impact cannot be denied around the world. With that, all homeowners with interest in selling should be prepared for the likelihood of home values dropping until this pandemic passes and the economy settles. While a drop in home values could leave sellers in a challenging situation, it’s also not ideal for anyone who may be looking to draw upon their home equity in the not-so-distant future.
While so much of our lives remain up in the air, and while the economy is so unsettled, this is an opportunity to pull back and see what happens. If the panic around COVID-19 dies down sooner than anticipated, buyers and sellers may not even notice a change in the market.
