Given the financial impact of the COVID-19 crisis, Americans are desperate for relief, and with stimulus bill negotiations stalled, President Trump has elected to take matters into his own hands. Earlier in August, he signed a number of executive orders, one of which calls for an employee payroll tax deferral beginning in September and lasting through the end of the year.
Currently, workers pay a 6.2% Social Security tax on up to $137,700 of earnings. Under the president's order, workers earning up to $104,000 per year won't have to pay that 6.2% for the next four months, leaving them with larger paychecks.
Now to be clear, the president only has the authority to defer those payroll taxes right now. But he's also pledged that if he's reelected in November, he'll seek to permanently forgive them. And while that may be good news for workers, at least in theory, it's terrible news as far Social Security is concerned.
A permanent payroll tax holiday could spell disaster for Social Security
Social Security gets the bulk of its revenue from payroll taxes, and losing out on four months' worth would create a scenario where the program's trust funds are depleted by mid-2023. Here's why that's bad news: In the coming years, Social Security expects to owe more money in benefits than it collects in revenue as baby boomers exit the workforce in droves. It can tap its trust funds to make up that difference and avoid benefit cuts as long as those funds contain money. But once they run dry, benefit cuts may be inevitable.
Prior to the COVID-19 pandemic, the Social Security Trustees reported that the program's trust funds would likely run dry by 2035. Of course, at the time, they could not have anticipated the recession and massive unemployment crisis that would later ensue. As such, that date might already happen sooner than anyone would like, even if the president's payroll tax break isn't made permanent. But if President Trump does succeed in forgiving those deferred taxes, it could mean that seniors on Social Security start facing cuts to their benefits in just three years' time.
Does the president have it in for Social Security?
It's not exactly news that forgiving four months of payroll taxes would be harmful to Social Security, but Trump has insisted throughout his reelection campaign that his intent is to protect the program, along with Medicare. If he's successful in letting workers off the hook permanently with regard to upcoming payroll taxes, the risk of near-term benefit cuts will increase exponentially.
That said, lawmakers are working on ideas to avoid benefit cuts. These include raising full retirement age (the age at which recipients can collect their monthly Social Security benefit in full) and allocating Social Security benefits based on need. Either way, something needs to be done to avoid a scenario where seniors see their Social Security income start to shrink. And if the president gets his way, that scenario might come a lot sooner than anyone initially planned on.