Honk if you think summer is when things slow down.
Sorry, you’re dreaming.
Just last Sunday you saw my column about the things affecting whether we should, or shouldn’t, defer taking Social Security benefits. I wrote it because many trends now suggest it might be better to abandon calm, lucid calculations of longevity.
Instead, the prudent path is looking more like don’t defer — take the money and run.
The notion was confirmed the next day.
The Bald Truth
That’s when Stephen C. Goss, the chief actuary for Social Security, released a letter providing an analysis of when Social Security would no longer be able to pay benefits if the payroll tax were eliminated.
The last sentence of his letter, a true bottom line, reads:
“We estimate that OASI Trust Fund reserves would become permanently depleted by the middle of calendar year 2023, with no ability to pay OASI benefits thereafter.”
Call it the bald truth. Without the payroll tax, Social Security is kaput.
The chief actuary was responding to a request by four senators, all Democrats. They wanted the actuary to estimate the financial consequences if President Trump were re-elected and made good on an almost offhand promise he made to permanently eliminate the payroll tax. He made the promise while announcing his executive order for payroll tax deferral.
69 Million People Depend on Social Security
The payroll tax supports Social Security, a program that sends checks every month to 69.1 million retirees, dependents and people who are disabled.
The Washington Post reported Trump’s promise this way on Aug.8:
“If I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax, Trump said at a news conference in Bedminster, N.J. “I’m going to make them all permanent.”
Fox Business News reported another detail a few days later on Aug.12:
“At the end of the year, on the assumption that I win, I’m going to terminate the payroll tax,” Trump said during a press briefing at the White House. “We’ll be paying into Social Security through the general fund.”
The Black Hole Deficit
The problem here is what’s in the general fund. Nothing. Zilch. It’s an astonishing black hole of deficit.
According to the most recent report from the Treasury, the net budget deficit through the month of July was $2,807 billion. It would have been larger, $2,837 billion, but for the slight surplus, $29 billion, in the off budget. The off budget is where Social Security and the payroll tax live. Separate, on its own, Social Security runs a small surplus.
That’s kind of important.
In fiscal 2019, according to the Congressional Budget Office, payroll taxes brought in $1,243 billion. That’s 36 percent of all federal revenue in the same period, $3,462 billion.
So, think about that. The president is casually talking about eliminating 36 percent of all federal revenue to give everyone a tax break. As an afterthought he mentions that Social Security benefits will be paid from the general fund, a place where no money exists.
Eliminate the payroll tax and you’re talking about a fiscal heart attack. It’s a Treasury heart no longer receiving its life-giving blood.
Cash.
The Wisdom of Long Ago
Since its creation, Social Security has been treated as a separate and independent part of the federal government. I think this is some evidence that we once had some wise people in government. Long ago, our elected representatives saw that Social Security was too important to be put in the same spending hopper as, say, proposals for bridges to nowhere. It was too important to have to battle, year after year, against powerful lobbies that wanted to spend federal revenue on, well, everything we can imagine and a lot we can’t imagine.
Can an argument be made for ending the payroll tax?
Yes, I think so.
A Possible Substitute for the Employment Tax
It’s the largest tax most Americans pay. It comes out of every dollar of labor earnings – unless you earn more than 94 percent of workers. It makes debates about the federal income tax silly because the blowhards in Congress – I’m referring to both parties here — never talk about the combined burden of the employment tax and the income tax.
Replacing the payroll tax with a value-added tax, for instance, would broaden the base of the tax and reduce the direct burden on worker paychecks. Think of it as our Social Contract Tax.
We could talk about this a long time.
But the important thing, for a country desperate for a few moments of stability and calm, is that the employment tax doesn’t just end. Any change starts with a plan. The plan starts with an idea for replacement.
Unfortunately, our president is big on grand announcements and short on actual plans.
Related columns:
Scott Burns, “Social Security: Should You Take It ASAP?,” 8/22/2020 https://scottburns.com/social-security-should-you-take-it-asap/
Scott Burns, “The Amazing Value of Social Security Benefits,” 5/23/2020 https://scottburns.com/the-amazing-value-of-social-security-benefits/
Scott Burns, “Social Security: The Last Source of Income,”5/16/2020 https://scottburns.com/social-security-the-last-source-of-income/
Scott Burns, “Social Security and Medicare: It’s All About the Cash,” 5/28/2019 https://scottburns.com/social-security-and-medicare-its-all-about-the-cash/
Sources and References:
Letter from the Office of the Chief Actuary, Social Security: https://www.ssa.gov/OACT/solvency/VanHollenSandersWydenSchumer_20200824.pdf
Brittany De Lea, “Trump plans to terminate payroll tax but will protect Social Security,” FoxBusiness, 8/12/2020 https://www.foxbusiness.com/politics/trump-terminate-payroll-tax-protect-social-security
Tony Romm, “Trump promises permanent cut to payroll tax funding Social Security and Medicare if he’s reelected,” Washington Post, 8/8/2020 https://www.washingtonpost.com/us-policy/2020/08/08/trump-payroll-tax-cut/
U.S. Treasury, Fiscal Year 2020 Budget Summary through July 2020 https://www.fiscal.treasury.gov/files/reports-statements/mts/budget-summary-with-adjusted-differences-report-july-2020.pdf
Congressional Budget Office, Monthly Budget Review: Summary for Fiscal Year 2019 https://www.cbo.gov/system/files/2019-11/55824-CBO-MBR-FY19.pdf
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Noelle Otto from Pexels
(c) Scott Burns, 2020
3 thoughts on “Want to Eliminate the Employment Tax? Start with a Plan.”
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Mr. Burns,
I highly doubt that whatever happens to the payroll tax, that benefits will cease in 2023 or anytime thereafter. Benefits are determined by law, and congress would have to change that law to affect benefits. I would predict revolution if they voted to cease or even significantly reduce benefits. So, the “answer” would be to print more money and/or find another source of funds for SS. Terminating the payroll tax isn’t the worst thing that could happen, in fact the whole trust fund business was a gimmick by FDR(he as much as said so) from the start to “protect” SS from future tampering.
Regards,
Steve Jenson
Who said Social Security benefits would cease in 2023. I didn’t.
Benefits may be determined by law but they are not an official liability of the U.S. government. They are an “obligation” and it can be changed at the will of Congress. They would, of course, have to face the consequences which would be dire. So far, they’ve started to tax benefits (as of 83′) and there have been multiple steps to reduce future benefits indirectly, such as raising the full retirement age from 65 to 67.
I think we can expect a lot more of that in the future.