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President Trump's New Executive Order Could Gut Social Security

By Christy Bieber – Aug 10, 2020 at 11:03AM

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The order could deprive Social Security of a key revenue source.

As Americans cope with a recession and record levels of unemployment, lawmakers in D.C. have been engaged in negotiation for weeks about how to provide ongoing financial relief. And while there have been some points of agreement -- particularly about the need for another coronavirus stimulus check -- they've been unable to find consensus.

In response to the standstill, President Trump has now signed executive orders that would defer payroll taxes for some Americans, as well as expand unemployment benefits by providing an extra $400 per week in aid for the jobless. But while the administration is touting the payroll tax deferral as a tax cut that would put more money in the pocket of Americans, that's not necessarily the case because the deferred taxes have to be paid eventually unless Congress forgives them so some employers may continue to withhold the money from workers' paychecks to help them avoid a huge tax bill. 

While the President will likely push Congress to forgive the deferred payroll taxes and has ordered the Treasury secretary to look at all alternatives for forgiveness, there's a big problem. A payroll tax cut is definitely not on the table in the stimulus negotiations. In fact, while the president has long pushed the idea, there's bipartisan opposition on Capitol Hill. 

One of the many reasons some lawmakers object is that the President's preferred policy is very bad news for Social Security. And, sadly, even a deferral without forgiveness could still be damaging for retirees. Here's what you need to know about the executive order, and why it could hurt one of the country's most popular and important entitlement programs. 

A tree-lined view of the White House, seen from across a lawn.

Image source: Getty Images.

How will President Trump's proposed coronavirus stimulus plan work?

With coronavirus negotiations on the verge of collapse, the president signed an executive order on Saturday ordering the treasury to defer the obligation to withhold, deposit, or pay the payroll tax on wages under $4,000 per biweekly pay period -- so anyone with an income under $104,000 would be impacted. The deferral will be in effect from September 1, 2020 to December 31, 2020.

Payroll taxes are collected on earned income, and the money is used to support Social Security and Medicare. The payroll tax rate for Social Security is 12.4% total on income up to an annual limit ($137,700 in 2020), with employers and employees each paying half and the self-employed covering the entire amount. Payroll taxes are also collected to fund Medicare, bringing the total tax rate to 15.3%, split between employees and employers. 

Reducing these taxes has been a priority item for the president for a long time, and in recent weeks his administration indicated he might be unwilling to sign a coronavirus relief bill that doesn't include a tax cut. And although neither the Republicans' proposed stimulus bill nor the bill passed by the Democrat-controlled House implemented his preferred policy, the president's new executive order demands that collection of these taxes be deferred through the end of the year. To be clear, that means that while employers wouldn't have to collect the money now or make periodic payments to the IRS, the taxes would have to be repaid next year without Congressional action. 

The President's authority even to take this limited action isn't very clear. But, if the federal government does move forward with implementing his plan and employers opt not to withhold payroll taxes, workers could see as much as 7.65% more take-home pay -- in exchange for a large tax bill next year. The President, however, has not only indicated he'd like the deferred funds forgiven but also that if he is reelected, his goal will be a permanent payroll tax cut. 

Unfortunately, only those who are currently working will benefit even in the short-term from the President's executive order since a payroll tax cut simply means there will be less revenue collected on earned income. Those who are unemployed will get no help, nor will retirees receiving Social Security checks. 

Why will Trump's payroll tax hurt Social Security?

Payroll taxes are the key revenue source for Social Security, providing $885 billion of the approximately $1 trillion in income it collected in 2018. If the president's executive order takes effect, Social Security could lose a substantial amount of this funding.

If Congress forgives the deferred taxes, or implements a permanent payroll tax cut as the President is urging, this would be devastating as Social Security is already facing a financial shortfall with its trust fund expected to run dry in 2035. The trustees have recommended raising the payroll tax, so a cut is the opposite of what needs to happen to protect retirees from a substantial benefits cut.

And payroll tax revenue is already projected to fall this year because of high unemployment, with experts warning the drop in revenue could hasten the day the trust fund runs short even without a payroll tax cut. Sadly, even the temporary tax deferral the president is suggesting could make things worse, as Social Security will lose out on the interest income earned from the taxes that would've been collected for the remainder of this year. 

And while lawmakers could theoretically find an alternative source of revenue for Social Security if the President succeeds in starving it of payroll taxes, lawmakers have thus far failed in fixing the program's financial woes. It's highly unlikely they'll be able to do so if the program is drained of even more money. 

Americans need to watch carefully to see how things play out with the implementation of Trump's executive order as well as with the President's stated plans for payroll taxes, as current and future retirees may want to start thinking about cutting their budget and saving more for the future in case of a possible cut to benefits within the coming years.  

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