Please ensure Javascript is enabled for purposes of website accessibility

Trump Will Pay This Much Into Social Security in 2020

By Sean Williams - Jan 24, 2020 at 6:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Hint: It's probably a much smaller dollar amount than you realize.

Earlier this month, on Jan. 1, Social Security celebrated the 80th anniversary of the first retired worker benefit being paid out. The rest, you could say, is history, with Social Security becoming one of the most relied-upon social programs for the elderly over the next eight decades.

According to figures from the Social Security Administration, 62% of current retirees lean on the program for at least half of their monthly income, with 34% reliant on Social Security for virtually all of their income. Without this guaranteed monthly stipend, it's estimated that the elderly poverty rate would soar to north of 40%, from a current poverty rate of 9%.

Two Social Security cards lying atop a W2 tax form, highlighting payroll taxes paid.

Image source: Getty Images.

Social Security's payroll tax is its funding workhorse

Although Social Security has three primary funding mechanisms -- a payroll tax, interest income earned on its asset reserves, and the taxation of benefits -- it's the 12.4% payroll tax affixed to earned income that does a majority of the heavy lifting.

Every year, the Social Security Board of Trustees publishes a report that highlights the short-term and long-term outlook for the program, as well as digs deep into its financials, allowing anyone interested to learn how Social Security generated income and spent the money it brought in. For 2018, Social Security's revenue generation topped $1 trillion for the first time ever, with the payroll tax on earned income (i.e., wages and salary but not investment income) responsible for $885 billion of this $1 trillion in collected revenue. When I say it's the program's workhorse, I mean it.

However, Social Security's payroll tax offers a loophole that allows well-to-do Americans, including President Donald Trump, the opportunity to escape taxation on a significant portion of their income.

President Trump smiling from behind the presidential podium.

President Trump behind the presidential podium. Image source: Official White House Photo by Joyce N. Boghosian.

Trump will pay a lot less in Social Security payroll tax than you probably realize

You see, Social Security's payroll tax has an attached earnings cap, which in 2020 is $137,700. This means all earned income between $0.01 and $137,700 is subject to the payroll tax, while any wages and salary above this amount are exempt. Roughly 94% of working Americans won't hit this earnings cap in 2020, and will therefore be paying into Social Security on every dollar they earn. Meanwhile, the ultrarich, capable of making more than $50.4 million in earned income this year (i.e., more than $137,700 per day), would be done contributing to the Social Security program by the end of New Year's Day.

Thus, in Donald Trump's case, he'll be responsible for paying into the Social Security system on his earned income up to $137,700 in 2020. This works out to $17,074.80 in payroll tax paid this year, no matter how much income above and beyond $137,700 Trump winds up earning.

Per the Social Security Administration, the amount of earned income that's escaping the payroll tax has surged from a little more than $300 billion in 1983 to approximately $1.2 trillion by 2016. As income equality increases, the percentage of wages and salary exempted from the payroll tax is liable to rise.

A chalkboard drawing of a seesaw, with a rich person surrounded by dollar signs weighing down the seesaw, while a family surrounded by question marks stands on the other side.

Image source: Getty Images.

The not-so-cut-and-dried payroll tax dilemma

Among the many "fixes" proposed to strengthen the Social Security program and fight back against an estimated $13.9 trillion cash shortfall over the next 75-year period is the idea of raising or eliminating this earnings cap associated with the payroll tax.

Right now the earnings cap is tied to increases in the National Average Wage Index (NAWI). If, say, the NAWI increases by 4% from one year to the next, the tax cap will also increase by a commensurate 4% -- the one exception being if and when Social Security's cost-of-living adjustment (COLA) is 0%, upon which the earnings cap also stays stagnant. The earnings cap will, however, play catch-up once a positive COLA is passed along.

Plain and simple, raising or eliminating the payroll tax cap would require that the well-to-do like Donald Trump pay more into the system. With the Trustees forecasting a complete exhaustion of Social Security's asset reserves by 2035, this extra revenue would really come in handy with regard to fighting back against the program's cash shortfall.

Sounds like a great plan, right? Well, not so fast.

The whole reason the payroll tax earnings cap exists is because the Social Security program also caps the monthly payout an eligible beneficiary can receive at full retirement age, which in 2020 is $3,011. This means a wealthy individual who earns $50 million a year for 35 years would potentially be taxed by Social Security on the entirety of their income, yet would only be eligible to receive $3,011 a month in return from Social Security. Admittedly, Trump isn't reliant on Social Security in any way. Nevertheless, there is a rhyme and reason as to why the payroll tax earnings cap exists.

But just because reasoning exists, it doesn't mean the calls for raising or eliminating the payroll tax earnings cap loophole for the rich are going to die down anytime soon.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.