Trump’s vow to end payroll tax threatens Social Security

President Donald Trump signed four executive actions regarding coronavirus relief on Saturday. Here’s a breakdown of the actions and what they will accomplish if deemed constitutional. Unemployment Benefits, The action plans to extend benefits with an extra $400 a week but stipulates that part of the funds must come from individual states. Evictions, Previous moratoriums will not be reinstated and no funding will be set aside for homeowners or renters. Payroll Taxes, The measure will not reduce taxes but instead will defer the due date for taxes paid by employees to December 31.

Friday marks 85th anniversary of Social Security Act, signed into law under FDR

EDITOR’S NOTE: Weekend Read is a new project by The Atlanta Journal-Constitution’s Content Curation Desk. The team will take a deeper dive at issues that affect Georgians and others throughout the nation. Today’s topic: Social Security.

The 85th anniversary of Social Security arrives on the calendar this year at a critical moment — and perhaps at one of the most uncertain times in its history.

With partisan rancor in Washington already at a fever pitch just weeks ahead of the November election, President Donald Trump has thrown Social Security’s immediate future into doubt after he vowed this week to permanently abolish the payroll tax — which largely funds the program — at the beginning of 2021 if he is reelected.

In last weekend’s executive moves, the president had only called for a deferral of the payroll tax, from September to December, in order to put more money in the pockets of consumers as the coronavirus pandemic continues to pummel the nation’s economy.

But now even that plan has become lost in the rigmarole of the administration’s recent statements, which appear to be toggling among three conflicting plans: one that forgives four months of deferred tax obligations, another that extends the deferral for the foreseeable future, and another, put forth Wednesday, that cuts payroll taxes altogether.

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Adding to the mixed messaging, Treasury Secretary Steven Mnuchin told “Fox News Sunday” host Chris Wallace that Trump was planning to push through legislation to ensure that the deferred payroll taxes are ultimately forgiven, which classifies as a tax cut, not a deferral.

The president’s unilateral effort would defer 6.2% of employee payroll taxes that are earmarked to pay for Social Security and Medicare.

Eliminating that tax liability would require congressional approval, and lawmakers from both parties have shown little desire to cut payroll taxes, according to The New York Times.

In an appeal to older voters, Democrats are accusing Trump of breaking a major campaign promise made in 2016 not to touch Social Security and Medicare, and argued his move would ultimately imperil the benefits for millions of Americans.

On Monday, former Vice President Joe Biden, the presumptive Democratic presidential nominee, tweeted: “Donald Trump said that if he’s re-elected, he’ll defund Social Security. We can’t let that happen.”

The Democratic National Committee echoed Biden the next day in a statement that highlighted “At Least 7 Times Trump Said He Will Permanently Eliminate Funds To Social Security And Medicare.”

Even members of the Republican Party have questioned the merits of Trump’s executive measures.

Iowa Sen. Charles Grassley, chairman of the Senate Finance Committee, which oversees tax policy, said he empathized with Trump’s efforts to provide tax cuts amid the impasse with Democrats.

“I think the best tax policy is the policy that’s long term, and that wouldn’t be long term,” Grassley said last week.

Social Security provides benefits to about 65 million people.

As it stands, nearly all American workers contribute to Social Security through automatic payroll tax deductions, and from there the benefits are distributed to nearly all of America’s senior citizens. About 97% of people ages 60 to 89 either receive Social Security or will receive it in the future.

The mere suggestion of deferring or cutting Social Security funding is considered a risky proposition at best and a potential dagger to the heart of one of the nation’s most popular social programs at worst.

Democrats have wasted no time seizing on the issue.

“In its simplest form, the deferral of employee payroll taxes from September through December is a lot of trouble for negligible benefit,” said Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities, a left-leaning research organization, according to The New York Times. “It’s not a tax cut,” he said. “That’s just wrong. It could turn into a tax cut if Congress later comes back and decides to do so. But Trump can’t cut taxes on his own.”

Notably, however, Democrats supported a 2011 payroll tax deferral of 2% under President Barack Obama during the height of the Great Recession. That relief effort provided $109 billion in tax relief to 159 million American workers, according to the Office of Tax Policy.

At that time, the legislation provided that “the Social Security Trust Fund [generated from payroll taxes] be made whole by transfers from the General Fund. Thus, the reduction in Social Security taxes paid by employees had no effect on the Social Security Trust Fund and no effect on individuals’ current or future Social Security benefits,” according to the 2011 report by the U.S. Treasury Department titled “A State-by-State Look at the President’s Payroll Taxcuts for Middle-Class Families.”

Trump’s executive action, by comparison, would in part defer Social Security payroll taxes for workers who earn less than $100,000 annually but wouldn’t forgive the tax, meaning citizens would need to pay the money back at the beginning of next year.

When Trump was asked how the General Fund could sustain the payments, he said, “We’re going to have tremendous growth. ... You will see growth like you have not seen in a long time.”

But fact-checking by The Associated Press showed otherwise.

“It is highly unlikely that economic growth would be enough to offset the loss of the payroll tax. Indeed, Trump suggested that his 2017 income tax cuts would propel economic growth as high as 6% annually. That never happened. Growth reached 3% in 2018, then slumped to 2.2% and the U.S. economy crumbled into recession this year because of the coronavirus,” the AP reported Thursday.

Further, the payroll tax deferral is optional for employers, and some economists have expressed doubt that any companies would participate if there was potential for tax liabilities. The Treasury Department also has yet to issue guidance on how businesses should implement the plan.

Mnuchin said Wednesday the Trump administration will “create a level of certainty” to encourage businesses to participate in Trump’s payroll tax holiday, and that after November’s election a victorious Trump would push legislation “to fully top up” Social Security’s finances.

Trump’s directive expresses a vague hope that the deferred taxes, which the Center for a Responsible Federal Budget estimates will amount to $100 billion, will somehow not have to be repaid, the AP reported. And it leaves unanswered how soon taxpayers would have to pay back what would amount to a loan if Congress doesn’t forgive the deferred taxes.

“We can’t force people to participate, but I think many of small businesses will do this and pass on the benefits,” Mnuchin told Fox Business.

Criticism, uncertainty

Criticism about the president’s plan quickly rippled from Capitol Hill to social media, with Trump maintaining that his four-month payroll tax holiday would not hurt Social Security, but it remains unclear whether the commander in chief has a plan in place to make up for the upcoming shortfall.

And, if Trump eliminated Social Security and Medicare payroll taxes without a replacement plan, it would remove nearly 90% of funding for Social Security benefits and threaten the program’s continued existence, according to some estimates.

Trump returned to the subject Wednesday at his nightly coronavirus briefing at the White House, where the president vowed to eliminate the payroll tax altogether if he wins in November, and do it without undercutting retirement benefits or greatly adding to the deficit.

“On the assumption I win, we are going to be terminating the payroll tax after the beginning of the new year,” Trump said.

Trump also said economic growth would offset the revenue losses, but AP’s fact check showed the president’s claims had “little basis in reality.”

“Trump, in effect, has endorsed defunding Social Security by not providing an alternative source of revenues,” the AP reported. “The risk is that this could destabilize an anti-poverty program that provides payments to roughly 65 million Americans. It also could force people to cut back on the spending that drives growth so they can save for their own retirement and health care needs if they believe the government backstop is in jeopardy.”

White House press secretary Kayleigh McEnany attempted to clarify the president’s stance Thursday, saying what Trump “meant” by “terminating the payroll tax” was that he wants “permanent forgiveness” of the deferrals, according to CBS News correspondent Mark Knoller. McEnany also said Trump was committed to fully funding Social Security.

Nevertheless, it remains unclear whether the White House has a concrete plan for a radical restructuring or whether the president was actively seeking to shift funding for the program elsewhere.

Joe Biden

Alarm bells were ringing across Washington and on the campaign trail over the matter.

Biden said Trump was putting Social Security “at grave risk” and also said the order would “defund” the retirement and disability programs. By Tuesday, Biden had a television ad up flipping between scenes of Trump golfing and worried, mask-wearing seniors as an announcer said the president wants to permanently cut “hundreds of billions of dollars a year” from Social Security.

“One of his biggest broken promises was his assurance that he would defend Social Security and Medicare. We know now that that was another lie,” DNC Chairman Thomas Perez said on a press call Monday. Speaker Nancy Pelosi and Senate Minority Leader Charles E. Schumer said in a joint statement Saturday that the president’s order would “endanger seniors’ Social Security and Medicare.”

Other actions

Trump signed four executive measures Saturday after the White House failed to secure a deal with Democrats in Congress following several weeks of talks on another stimulus measure.

The president’s other actions include deferred student loan payments, discouraged evictions and provide for enhanced unemployment benefits if states agree to contribute money to the program. Just how much relief employees receive and the overall impact remains to be seen.

The benefits will largely depend on the discretion of states, landlords and employers, according to The Associated Press. On the payroll tax, for example, many employers aren’t expected to make a change to employee withholdings because the same amount of money will still be due by the end of the year.

Separately, there is also speculation about whether Trump even has the constitutional authority to extend federal unemployment benefits by executive order. Equally up in the air is whether states, which are necessary partners in Trump’s plan to bypass Congress, will sign on.

“It is far from clear that the payroll tax holiday will achieve its intended objective of, as the president said, ‘save American jobs and provide relief to the American workers,’” Mark Hamrick, senior economic analyst for Bankrate.com, said in a statement. “First, the action is a deferral of these taxes, not an elimination of them. So, the bill is still due, it just isn’t due in the short-term. Let’s remember it is the unemployed who need help, not so much Americans who are still working and who’d get the benefit.”

History of Social Security

Controversies about Social Security funding are nothing new.

The Social Security Act was signed into law on Aug. 14, 1935, two years into President Franklin D. Roosevelt’s first term.

FDR, a Democrat, promised a New Deal for the American people in the midst of The Great Depression, which before the coronavirus pandemic had been the worst economic crisis in U.S. history.

The desperately needed program came along when more than half the nation’s senior citizens were living in poverty.

Social Security was the first time the country provided federal assistance for the elderly. It achieved this by imposing a payroll tax on employers and employees.

The Social Security program remains Roosevelt’s most enduring legacy, and its funding and expansion has been a consistent campaign issue every election since its inception.

From the beginning, the act provided benefits for retirement, unemployment and even a lump-sum payment at death. It gave states funding to provide unemployment insurance and public health services.

The very notion of the federal government offering public assistance was controversial then as it is today. The plan was decried as socialism.

One counterproposal that was floated at the time — that citizens build their own nest eggs over a lifelong career — evolved through the years into what we know today as 401(k) savings and Roth IRAs.

The Supreme Court upheld the Social Security Act in two rulings in 1937 — Steward Machine Company v. Davis, and Helvering v. Davis — which determined the tax and the obligation imposed by Congress for employers to pay it — was indeed constitutional.

In the early going, Social Security benefits excluded most women and minorities.

Through the years, though, the program has gradually moved toward becoming more universally inclusive as the rights of women, minorities and other citizens have shifted.

Why it matters

More than 63 million people, or more than 1 in every 6 U.S. residents, collected Social Security benefits in June 2019, according to the Center on Budget and Policy Priorities, a progressive U.S. think tank that analyzes the impact of federal and state government budget policies.

The program provides critical income for groups with low earnings and less opportunity to save and earn pensions, including minorities who face higher poverty rates.

While the Social Security budget has skyrocketed through the years, the benefits paid out to individuals are modest. But without them, about 4 in 10 people ages 65 and older — or roughly 15 million elderly Americans — would have incomes below the poverty line, the center reported.

The average Social Security retirement benefit last year was about $1,470 a month, or about $17,640 a year, according to the data.

Also in 2019, Social Security benefits replaced only about 38% of income for a person who retired at 65 after working a lifetime at average earnings, according to the group’s analysis. This rate is expected to fall to about 35% for the same demographics in the future as the legal retirement age continues to rise.

Additionally, “most retirees enroll in Medicare’s Supplementary Medical Insurance (also known as Medicare Part B) and have Part B premiums deducted from their Social Security checks,” the center reported. “As health care costs continue to outpace general inflation, those premiums will take a bigger bite out of their checks.”

Where things stand now

Previously, Trump said if he wins reelection he would simply extend the tax cut, though he did not say how — or what he would do to offset any potential impact on Social Security funding.

The president’s action could lead to the delay in $100 billion in payments to the Social Security Trust Fund, according to an updated estimate by the nonpartisan Committee For A Responsible Federal Budget, which advocates for reducing government deficits.

“What it does is undercut Social Security,” said Rep. John Larson, D-Connecticut, who is chairman of the House Ways and Means subcommittee overseeing the retirement program. He added that Trump “is defunding Social Security and breaking his promise. ... He will say, ‘I’m not doing anything to touch Social Security, I’m just deferring this,’ but it’s as clear as my hand in front of me.”

The non-profit group Social Security Works published a news release Aug. 8 in which the group’s president Nancy Altman wrote, “Donald Trump once promised that he would be ‘the only Republican that doesn’t want to cut Social Security.’ We now know that what he meant is that cutting Social Security doesn’t go far enough for him: He wants to destroy Social Security.”

The future

The trust fund holding the program’s assets contained about $2.9 trillion at the beginning of this year, but that is projected to start dwindling next year as benefit payments outpace income from the payroll taxes paid by workers and employers, who kick in another 6.2% of wages, up to $137,700 this year. Income taxes on benefits as well as interest earned on trust fund assets provide a small added cushion.

Social Security actuaries said in April the fund would be able to pay full benefits only through 2035, though that’s since moved up due to the pandemic-induced recession sapping payroll tax receipts and sparking more and earlier retirements. The Bipartisan Policy Center says the exhaustion date might now be as soon as 2029.

An eye-opening report by Forbes this past week calls for an increase in payroll taxes as one of four ways to help save the Social Security program.

A one-time loss of $100 billion in Social Security taxes, about one-tenth of the program’s annual income, probably won’t hasten the program’s demise that significantly. But last Saturday, Trump opened the door to permanently undoing the workers’ share of payroll taxes.

“If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax,” Trump said. “Now, Joe Biden and the Democrats may not want that. ... So they’ll have the option of raising everybody’s taxes and taking this away.”

Presidential advisers including National Economic Council Director Larry Kudlow and Mnuchin immediately started walking back the president’s comments. “The tax is not going away,” Kudlow said Sunday on CNN’s “State of the Union” show. “The president in no way wants to harm those trust funds,” Mnuchin told Fox News on Sunday.

ArLuther Lee covers national and international news for The Atlanta Journal-Constitution. He holds a bachelor’s degree in journalism from the University of Florida and has worked for newspapers for more than 23 years. He joined the AJC in 2003 as the front-page designer and enjoys running and playing chess.

Information provided by The Associated Press was used to supplement this report.

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