As lawmakers have struggled to determine what kind of coronavirus relief to provide Americans during the 2020 recession, President Trump has consistently pushed for one particular type of financial aid: A payroll tax cut.
Payroll taxes are collected on wages to help fund Social Security and Medicare. The President wants to temporarily stop assessing them for Social Security. He's actually signed an executive order that would defer the collection of them from September until the end of the year (although the money would ultimately have to be paid back unless Congress acts). The President has pledged the unpaid taxes will be forgiven if he is reelected, although it's not clear exactly how he'll ensure that occurs.
Although the President has been aggressive in pushing for this proposal and has now attempted an end-run around a Congress that didn't embrace it, there's a strong argument to be made that Social Security will suffer if he gets his wish. And since many current and future retirees depend on Social Security, or plan to, that could be a big problem.
There are actually two ways the President's plan hurts Social Security retirees
Social Security retirees will suffer in two ways if the President's preferred plan to cut payroll taxes goes into effect.
First and foremost, payroll taxes provide the bulk of Social Security's funding. In fact, in 2018, the program collected around $1 trillion in total income, an estimated $885 billion of which came from payroll taxes.
If the President gets his wish and the uncollected taxes are forgiven, the program could lose billions of dollars in income this year. And even if Americans eventually have to repay the taxes they owe, that won't happen until next year so the program would lose out on interest income it could've earned had the revenue been collected on time. That's a lot of lost interest income when you're talking about billions of dollars.
Since Social Security was already facing funding shortfalls, starving it of money, even temporarily, could hasten the day the trust fund runs dry. And when that happens, retirees could face benefit cuts equaling as much as 24% if Congress doesn't act.
Sadly, retirees won't just suffer in the future. If the President gets his wish and coronavirus relief takes the form of a payroll tax cut, most Social Security retirees won't get any help because they generally don't work; waiving payroll taxes only helps those who earn income subject to them. While most seniors would get a check valued at up to $1,200 per adult (plus $500 for each additional dependent) under other stimulus proposals, including the HEROES Act and the HEALS Act, a payroll tax cut without a stimulus check would mean most get no financial assistance at all. And with many seniors facing financial hardship due to COVID-19, that's also a big problem.
What can seniors do to mitigate the damage?
Retirees are looking at a very real risk they'll receive no stimulus funds now and will see benefit cuts over the next 15 years. Preparing for this possibility means shoring up your financial situation for the present and the future.
When you're on a fixed income, that often means finding ways to limit spending. It's also essential to make sure you have the right asset allocation and a sound strategy for determining a safe withdrawal rate, so you don't drain your nest egg in case you must depend more on it in the future.
If you currently live in one of the states where Social Security benefits are taxed, it may also be a good idea to look into relocating so you can keep more of your money. And if you don't have to take required minimum distributions this year, avoiding it could help reduce your tax bill for 2020 and keep more of your money invested for the future when you may really need it.