Please ensure Javascript is enabled for purposes of website accessibility

Social Security Cuts Could Happen in 3 Years If Trump's Payroll Tax Break Is Made Permanent

By Maurie Backman – Aug 31, 2020 at 7:36AM

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

Benefit cuts were always on the table, but now, they could happen a lot sooner than anyone is ready for.

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.

Older man holding his face, sporting worried expression

Image source: Getty Images.

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.

The Motley Fool has a disclosure policy.

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 09/29/2022.

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.