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Would Trump's 0% Payroll Tax Crush Social Security?

By Dan Caplinger - Mar 15, 2020 at 12:02PM

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The answer's in the details.

Social Security provides key financial support for tens of millions of retirees, and the growing wave of Baby Boomers receiving benefits has put a long-anticipated strain on the program. The vast majority of money that funds current Social Security benefit payments comes from the payroll taxes that workers currently pay, but even with that source of revenue, money set aside in Social Security's trust funds will likely run out by the mid-2030s.

Meanwhile, the COVID-19 outbreak has put new stress on the global economy, and President Trump has sought ways to provide fiscal stimulus to keep the economy growing. One proposal Trump has reportedly made involves cutting payroll taxes to 0% for the remainder of the year. Although putting more money in people's paychecks could provide some help, Social Security advocates are worried about the ramifications of diverting money from Social Security.

What payroll taxes mean to Social Security

Social Security relies largely on the revenue it gets from collecting payroll taxes. Currently, workers pay 6.2% of their pay toward Social Security payroll taxes, and their employers pay a matching 6.2% amount. Those who are self-employed end up paying the combined total of 12.4%. The tax gets imposed on a maximum amount of pay each year, with the 2020 limit coming in at $137,700. A typical worker making $40,000 a year would pay $2,480 in Social Security payroll taxes, while high-income employees would top out at the $8,537.40 maximum tax for 2020.

Two Social Security cards with a $100 bill underneath.

Image source: Getty Images.

Those amounts collected from individual workers add up. Social Security collected more than $885 billion in payroll tax contributions in 2018, the most recent year for which the Social Security trustees have made information available. That represented the vast majority of the roughly $1 trillion in revenue that Social Security received, and it was enough to pay almost 90% of all the benefits that Social Security recipients got that year.

If Social Security stopped receiving that $885 billion, the impact would be immediate. Benefits would have to get funded almost entirely by trust fund balances. With asset levels of about $2.9 trillion, the program could only go for four years before using up its entire savings. Even if a payroll tax cut lasted only for the last nine months of 2020, the roughly $660 billion hit would dramatically accelerate the time at which the trust funds would be empty.

How to cut payroll taxes and still protect Social Security

The question, though, is whether President Trump's proposal would leave Social Security high and dry for the rest of 2020. With past temporary payroll tax reductions, that was not the case.

For instance, for 2011 and 2012, President Obama reduced the Social Security payroll tax on employees from 6.2% to 4.2%. That led to reductions of more than $100 billion a year in revenue to fund Social Security benefits. However, under the legislation that allowed for the payroll tax cut, the federal government's general fund made transfers to the Social Security trust funds to make up the difference -- effectively leaving Social Security whole.

Obviously, a payroll tax cut all the way to 0% would have a much more dramatic financial impact, especially if it applies both to employees and employers. The federal government could still make transfers to leave Social Security's trust funds unaffected, but the size of the transfers would have to be larger. With the federal budget already running a high deficit, there's a great deal of debate about whether such a transfer would be fiscally prudent.

Demand the details

It's easy to propose a temporary suspension of payroll taxes to stimulate the economy. But before you decide whether that's a good idea, it's essential to look at the second-order effects. The longer-term impact on the Social Security system depends on whether the proposal aims to replace lost payroll tax revenue to make the program whole. Without knowing which way President Trump would go on that key question, it's impossible to know whether this is a larger attack on Social Security itself.

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