Please ensure Javascript is enabled for purposes of website accessibility

Trump Could Kill Social Security in 2.5 Years With This Proposal

By Sean Williams – Sep 4, 2020 at 6:06AM

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

Putting more money into worker's pockets would have dire consequences for our nation's top social program.

Social Security is a program that senior citizens have come to rely on during their golden years. According to the Social Security Administration, 62% of retired workers lean on their benefit to account for at least half of their monthly income, with 34% of seniors relying on Social Security for virtually all of their income (90%-100%). Without this program, elderly poverty rates would be over four times higher than they are today.

Unfortunately, this game-changing social program also finds itself in serious financial trouble.

A senior counting a fanned pile of cash in his hands.

Image source: Getty Images.

Social Security is facing a $16.8 trillion funding shortfall

Every year, the Social Security Board of Trustees releases a report that outlines the short-term (10-year) and long-term (75-year) outlook for the program. For each of the past 35 years, it's cautioned that long-term outlays would outpace collected revenue. In the 2020 report, the Trustees estimate there to be a $16.8 trillion funding shortfall between 2035 -- when Social Security's $2.9 trillion in asset reserves are forecast to run out -- and 2094. 

If there is a silver lining of sorts for seniors, it's that Social Security can't go bankrupt, even if its net cash surpluses built up over time (i.e., its asset reserves) run dry. That's because two of Social Security's three sources of funding -- the 12.4% payroll tax on earned income and the taxation of benefits -- are recurring sources of revenue. As long as the American public keeps working, money will continue flowing into the program for disbursement to eligible individuals.

But as you can imagine, the depletion of Social Security's asset reserves won't be without consequences. Without intervention from lawmakers on Capitol Hill, sweeping benefit cuts of up to 24% may need to be passed along to retired workers and future retirees beginning in 2035 to keep the program solvent. Given the aforementioned reliance on Social Security income, this is a downright terrifying forecast.

President Trump delivering remarks.

President Trump delivering remarks. Image source: Official White House Photo by Tia Dufour.

Donald Trump could decimate Social Security

The problem for Social Security is that it's not the most pressing issue in Washington at the moment. That title goes to the coronavirus disease 2019 (COVID-19) pandemic and the need to provide additional stimulus to businesses and the American public.

One of the many stimulus proposals to prop up an ailing U.S. economy and consumer comes from President Trump.

On numerous occasions over the past six months, Trump has insisted on a payroll tax holiday or deferral in the near term. Though a payroll tax holiday would boost the take-home pay of working Americans, it would also result in Social Security collecting less revenue. A payroll tax deferral would have a similar effect, except the payroll tax revenue would need to be made up at a later date by working Americans. In other words, it would shift today's payroll tax liability further down the line for workers. The executive orders Trump signed last month call for a four-month payroll tax deferral between Sept. 1 and Dec. 31.

However, Trump's advocacy of a payroll tax holiday goes well beyond 2020. On a handful of occasions, the president has called for the permanent elimination of the payroll tax. As a consumption-driven economy, putting more money into the hands of working Americans might sound like a pretty harmless idea, but it would prove devastating to the Social Security program.

Two Social Security cards and two one hundred dollar bills lying atop a payout table.

Image source: Getty Images.

Donald Trump's remarks about eliminating the payroll tax for good were made off the cuff, and officials in his administration have said there's no official proposal or even a discussion of making such a move. Still, four senators -- Bernie Sanders (I-Vt.), Chuck Schumer (D-N.Y.), Ron Wyden (D-Ore.), and Chris Van Hollen (D-Md.) -- sent a letter to the Social Security Administration on Aug. 19 requesting an analysis of this hypothetical legislation proposed by Trump. Suffice it to say, the results were scary.

If the payroll tax was eliminated beginning on Jan. 1, 2021, the Disability Insurance (DI) Trust would be permanently insolvent in roughly six months, according to Chief Actuary Stephen Goss. Meanwhile, the Old-Age and Survivors Insurance (OASI) Trust, which is what pays retired workers and survivors of deceased workers, would become "permanently depleted" by the midpoint of 2023. 

The payroll tax was responsible for $944.5 billion of the $1.06 trillion that Social Security collected in 2019. Without this lion's share of revenue, the Social Security program would only be able to generate revenue from the taxation of benefits and the interest it earns on its asset reserves. Neither of these funding sources generates consistent income for the program. For example, the taxation of benefits is dependent on beneficiaries filing their taxes in the first three to four months of the year. Without the revenue consistency the payroll tax provides, and with the OASI's and DI's asset reserves being quickly depleted and thus not generating interest income, Social Security as we know it would be dead in under three years. 

The facade of the Capitol building in Washington, D.C.

Image source: Getty Images.

Breathe easy: This isn't going to happen

Now, for some good news: Trump's vision of eliminating the payroll tax in order to boost take-home paychecks has almost zero chance of ever getting off the ground.

Trump's staff has said that a permanent removal of the payroll tax isn't on the table as a stimulus measure. Furthermore, with the understanding of the damage that such a move could cause to seniors and the disabled, it has virtually no support from either Democrats or Republicans in Congress. There's some debate over what powers the executive branch has to unilaterally change tax policy, but most experts concur that Congress can't be circumvented on the payroll tax elimination question. No matter how much the president touts the idea, it has no serious path forward.

As long as Social Security continues to be funded by payroll tax revenue and the taxation of benefits, there's no chance of future bankruptcy. This means you will be entitled to a retirement benefit as long as you've earned the requisite number of work credits (40).

However, there are still very serious issues that lawmakers are going to have to contend with in the years to come. No one wants to see retired worker benefits slashed by 24% in 2035, which means elected officials from both sides of the aisle will need to come together to work on a solution that strengthens the program for current and futures retirees.

The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.