Social Security serves as a critical income source for millions of older Americans, but the program is deep in the throes of a financial crisis that could worsen as the coronavirus pandemic drags on. Social Security's primary source of revenue is payroll taxes -- the taxes that workers pay on earnings of up to $137,700 (that's the threshold for 2020, but it changes from year to year).
In the coming years, Social Security stands to collect much less payroll tax as baby boomers exit the workforce in droves. And as a double whammy, once boomers retire, they're apt to start drawing their own benefits, thereby creating an additional financial burden for Social Security to bear.
Thankfully, the program does have trust funds it can tap to compensate for declining payroll tax revenue and keep up with its scheduled benefits, but once those funds run dry, benefit cuts will be on the table. And that could happen sooner rather than later. Millions of Americans have lost their jobs in the course of the coronavirus pandemic, and as such, Social Security is already looking at a glaring revenue shortfall for this year alone.
But that's not the only thing current and future Social Security recipients need to be concerned about. In August, President Trump signed an executive order calling for a four-month payroll tax deferral for workers earning up to $104,000 a year. From September through December of 2020, eligible earners won't have payroll taxes for Social Security deducted from their wages.
It's this very tax break that has most Americans concerned. Specifically, 86% of Americans now worry that this new payroll tax break will end up hurting Social Security in the long run, according to the SimplyWise September 2020 Retirement Confidence Index. But are they right?
Is Social Security really doomed?
Social Security is in big trouble, but not necessarily any more so because of the president's payroll tax break. The reason? In its current state, that tax break is merely a deferral of taxes to temporarily boost paychecks, and the plan is to have workers pay those taxes back beginning in January of 2021. As long as that happens, Social Security won't actually lose out on four months' worth of payroll tax revenue -- it will just collect that money early next year instead of getting it now.
That said, President Trump has stated that if he's reelected in November, he'll seek to have those four months of payroll taxes forgiven on a permanent basis, and that could serve as a devastating blow to Social Security. But we don't know how the upcoming election will pan out, and it's not a given that Trump will be successful in his efforts to wipe out that payroll obligation completely. So for now, there's no need for the public to assume the worst.
Though Social Security is in trouble and benefit cuts may happen down the line, lawmakers are also invested in preventing that scenario -- namely, to prevent the millions of seniors who currently rely on those benefits from plunging below the poverty line. Right now, it's best for working Americans to keep a positive attitude about Social Security, all the while making every effort to save for retirement independently so that if benefits are indeed cut, they're not totally out of luck.