US President Donald Trump signs executive orders extending coronavirus economic relief on August 8, … [+]
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Throughout the 3 ½ years of his presidency, Donald Trump has disrupted nearly every major institution of government, save one. He has politicized the military, upended strategic alliances that have been a bedrock of US foreign policy for 75 years, overturned civil rights protections, undone the postal service, and—with help from a Republican Congress- remade much of the federal income tax code.
But in his 2016 campaign, Trump vowed to leave Social Security untouched. And he has, somewhat uncharacteristically, kept that promise. Until now.
On Saturday, in a press briefing to promote a package of unilateral initiatives aimed at responding to the covid-19 economic slump, Trump declared a longer-term goal. He announced that, if reelected, he would “terminate” the payroll tax that funds Social Security and (perhaps) the payroll tax that supports the hospital insurance piece of Medicare. Currently, employers and employees each pay 6.2 percent of wages up to $137,700 for Social Security and 1.45 percent of wages for Medicare, with no cap.
Short-run deferral
In the short run, Trump also said employers would not have to collect Social Security payroll taxes from workers making less than about $104,000 annually, apparently from Sept. 1 through the end of the year. However, those taxes still are owed, and workers would have to pay them after Jan. 1. Earlier this year, Congress temporarily relieved employers from remitting their share of the Social Security tax to the IRS through the end of the year. However, firms must pay these deferred taxes in 2021 and 2022.
Trump’s unilateral deferral of the employee share of the Social Security tax is likely to have little impact on either the program’s finances or the economy. His initiative will not benefit the 30 million people who have lost their jobs in the pandemic since they earn no wages and pay no Social Security tax.
And while Trump’s executive action allows firms to postpone payroll tax collections from their workers, firms have discretion. And it appears many will continue to withhold the levy from their employees’ pay checks, given the many legal and practical uncertainties surrounding Trump’s action. Thus, workers’ take-home pay is not likely to increase as a result of his announcement.
Of course, if firms continue to withhold during the fourth quarter and remit the payments in January, the effect on the Social Security Trust Fund would be minimal as well.
Long-run repeal
But Trump’s interest in permanently repealing (or perhaps merely cutting) Social Security and Medicare taxes would be an entirely different matter. The trust funds for both programs already are running short of money. The Social Security fund is expected to be unable to pay all its obligations by 2035 (probably sooner when the effects of the current economic slump are taken into account). Medicare’s hospital insurance fund is in even worse shape. It is likely to face insolvency in five years or less.
This is what Trump said on Saturday: “If I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax. I’m going to make them all permanent. In other words, I’ll extend beyond the end of the year and terminate the tax.”
What did he really mean? Who knows? On Sunday, Trump aides were furiously trying to walk back his comments, but they seemed unable to explain exactly what he meant. On Sunday, Trump himself implied his plan to repeal the tax would have no “impact” on Social Security. Treasury Secretary Steven Mnuchin insisted that any payroll tax cuts would be made up by shifting general revenues into the trust funds.
Altering the status of Social Security
But replacing a dedicated payroll tax with income taxes or other general fund revenues would fundamentally alter Social Security. Its status as a social insurance program, funded by a dedicated tax (or contribution), would be muddled at best. Instead of operating as a guaranteed entitlement supported by that dedicated tax, it would be subject to annual meddling by Congress.
Trump has been remarkably silent about his tax agenda for a second term. He’s vowed to permanently extend the Tax Cuts and Jobs Act and promised unspecified middle-income tax cuts (he did that again on Saturday). But he’s never explained what those new tax cuts would look like. He also talked on Saturday about somehow cutting capital gains taxes, but without saying what he’d do.
His only new explicit tax promise seems to be to repeal (or at least permanently cut) Social Security—and maybe Medicare—payroll taxes. It’s an odd choice given the enormous popularity of the programs, especially among older voters who are critical to his reelection. Eighty percent of those 65 and older (and three-quarters of all Americans) oppose Social Security benefit cuts—a certain outcome if the program’s funding is eliminated or even reduced.
On the other hand, for a president who has disrupted most everything else government does, he was going to get to Social Security sooner or later.