By Richard Rubin
WASHINGTON -- President Trump ordered the Treasury Department to
allow the deferment of most workers' Social Security payroll-tax
payments for the final four months of the year. What does that mean
for the Social Security program?
The Social Security portion of the payroll tax is 12.4% on wages
and self-employment income up to $137,700 this year, split between
employers and employees, and it's the largest source of funding for
Social Security benefits.
Here's a quick look at the plan's implications for Social
Does the president's payroll-tax deferment hurt Social
Directly, not very much. The president lacks authority to reduce
payroll taxes without Congress, so all he's doing is allowing the
deferment of payments. When that happens, the Internal Revenue
Service ultimately won't be able to collect the money from some
people, including some who have left the jobs they hold now. That
will leave a shortfall. The Committee for a Responsible Federal
Budget estimates that missing amount at $5 billion. That's a few
days worth of Social Security benefits.
OK. But what if Congress actually cuts the taxes?
Mr. Trump wants Congress to forgive any deferred taxes and says
he'll push for that if re-elected. Depending on how many employers
stop withholding payroll taxes and how Congress writes any
forgiveness, this would create a much larger budget hole, perhaps
around $100 billion.
Even then, the effect on Social Security benefits is likely to
be minimal. Congress is likely to do exactly what it did in 2011
during a prior payroll-tax cut. It transferred money from general
government revenue to the Social Security Trust Fund to cover the
missing taxes. Mr. Trump said he would want Congress to do that
But didn't Trump say something about making permanent cuts to
Social Security taxes?
Yes, but his statements were confusing.
On Saturday, when announcing the deferment, he said, "I plan to
forgive these taxes and make permanent cuts to the payroll tax. So
I'm going to make them all permanent."
The following day, his top economic adviser, Larry Kudlow, said
on CNN that the president didn't mean that he wanted to eliminate
the Social Security payroll tax permanently. Instead, the aim is
just to forgive any taxes deferred this year.
Then later Sunday, Mr. Trump said "it may be permanent."
Democrats and Social Security advocates have seized on the
president's remarks and the payroll-tax deferment to warn about the
effects of Mr. Trump's proposals and the potential for future
"President Trump is brazenly circumventing Congress to institute
tax policy that destabilizes Social Security," said Rep. Richard
Neal (D., Mass.), chairman of the House Ways and Means
Republicans have been particularly wary of making detailed
Social Security proposals since President George W. Bush's failed
push for partial privatization. President Trump promised in 2016 to
protect the program. Many Democrats want to raise Social Security
taxes on high earners and increase benefits.
So there's no reason to worry about Social Security?
Not necessarily. The payroll-tax mechanism is an essential part
of the program. As a share of what they earn, lower-income workers
pay more money into the program than upper-income workers do
because the tax stops at $137,700 of wages. But the benefits are
tilted toward lower-income workers.
The structure of the Social Security program helps make it
popular because it operates more like an earned benefit and less
like a welfare program.
Of course, workers' taxes aren't saved to fund their own
retirements; today's taxes pay for today's benefits. But the wages
that are used to determine the tax are also used to set benefit
amounts, connecting what people pay in with what they get out.
"I know I pay it," said Jason Fichtner, who teaches at Johns
Hopkins University's School of Advanced International Studies.
"There's a link to the benefits I'm getting. That puts constraints
on the program, healthy constraints."
Breaking those links by changing the payroll tax and using more
general-fund money could affect the long-term political support for
In a statement, AARP, the advocacy group for older Americans,
said it was concerned with the administration's approach and said
that it "exacerbates people's already-heightened fears and concerns
about their financial and retirement security."
What is the current state of Social Security?
In the short run, it's fine. In the long run, not so much. The
aging U.S. population means that there are fewer workers to support
each retiree and the Social Security program will soon start
spending more money than it takes in each year, relying on funding
from years when it had a surplus.
According to estimates calculated before the pandemic, the
Social Security retirement-benefits trust fund will run out of
money in 2034. At that point, if Congress does nothing, only
partial benefits would be paid, using the money that's still coming
in. To prevent that outcome, Congress could raise taxes, reduce
benefits a different way or make other changes to the program.
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
August 12, 2020 10:44 ET (14:44 GMT)
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