As lawmakers discuss the possibility of a new round of coronavirus aid, there's one item on President Donald Trump's wish list that could do incredible damage to Social Security: a payroll tax cut.
Social Security is already in financial trouble, and the COVID-19 pandemic is likely to damage its finances further. If President Trump gets a payroll tax cut put through, the effects for retirees and the disabled could be devastating.
Payroll taxes make up nearly all of Social Security's income
Payroll taxes are collected from your paycheck for Social Security and Medicare.
Image source: Getty Images.
In most cases, employees pay a 6.2% payroll tax specifically for Social Security, and employers pay another 6.2% for a total tax of 12.4%. Those who are self-employed pay the whole amount themselves. The tax is collected on income up to a certain threshold, called the wage base limit.
Payroll taxes paid to Social Security provided $805.1 billion in revenue in 2019, according to the 2020 Social Security Trustees report. That's more than 87% of the $917.9 billion in total funding it received in 2019.
President Trump wants to cut off this key funding source
Despite the importance of this revenue source, President Trump has, at various times, suggested eliminating payroll taxes until the election or until the end of 2020, or even suspending them indefinitely. His push has intensified in recent weeks during the coronavirus recession.
And while money was moved from the general fund to Social Security's trust fund during the last payroll tax cut in 2011, it's unclear what funding mechanism would replace the money under Trump's proposal.
If money is again moved from the general fund, this would add billions to an already-ballooning deficit while weakening the relationship between revenue and benefits that's made Social Security one of the most popular programs in U.S. history.
The money is needed now more than ever
Social Security uses the money from payroll taxes (along with revenue from taxes on benefits) to pay current retirees, survivors, and disabled individuals. When there's a surplus, it's invested to increase the program's trust funds (there are actually two funds: one that supports retirement and survivors benefits, and one that supports disability benefits). If revenue is too low to pay out promised benefits, money from the trust funds makes up the difference.
The trust fund for retirement and survivors benefits is already expected to run short in 2034. And although money from the disability fund is likely to be diverted to shore it up, the trustees' report warned the combined funds are expected to run short in 2035.
Sadly, that report didn't take into account the effects of COVID-19, which will likely cause a shortfall in payroll tax revenue even at current tax rates due to increased unemployment. Coupled with the fact that recessions lead to early benefits claims that increase capital outflows, it's clear Social Security's financial troubles will be compounded greatly by the coronavirus.
In other words, Social Security needs more money now, not less.
Will President Trump's plan devastate Social Security?
President Trump aimed, unsuccessfully, to cut payroll taxes as part of the March coronavirus stimulus bill. He has now issued an ultimatum, stating that some form of payroll tax cut must be included in any new legislation passed to lessen the financial damage from COVID-19.
But his plan is getting pushback from both sides of the aisle. Arguments against it go beyond the potential damage to Social Security. Cutting payroll taxes simply isn't a great way to get extra cash into the hands of people who no longer pay them since they no longer have jobs.
If lawmakers don't act at his urging, President Trump's efforts to starve Social Security of revenue won't come to fruition. But if he holds firm in insisting a payroll tax cut must be included in coronavirus relief and lawmakers accede, those counting on Social Security will have a lot to worry about.
Contacting Congress to speak out against the plan may be the best way to help prevent this outcome. But with Social Security's finances so precarious as is, it's a good idea for current workers to consider increasing retirement investments in case of benefit cuts in the future.
