President Donald Trump’s move to defer Social Security payroll taxes could be taking him into treacherous political territory.
His directive — aimed at boosting an economy shaken by the coronavirus pandemic — doesn’t affect retirement benefits but impacts how they’re paid for. Democrats seized on it Monday as a signal that Trump would cut the social safety net and break a promise he made as a candidate in 2016 not to touch Social Security and Medicare. Some nonpartisan experts also expressed concerns.
Deferral of the 6.2% payroll tax on employees for the last three months of this year could mean that up to $100 billion in payments to the Social Security Trust Fund would be delayed, 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,” Rep. John Larson, D-Conn., said Monday, addressing Trump’s move. The president “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 me.” Larson chairs the House Ways and Means subcommittee overseeing the retirement program.
The Democratic National Committee was out with a video accusing Trump of breaking his promise to older Americans.
The White House pushed back.
“Providing a payroll tax deferral poses no risk to the Social Security Trust Fund and puts more money in the pockets of hardworking Americans as we fight to end this pandemic from China and rebuild our economy safely,” spokesman Judd Deere said in a statement. “This has been a priority for President Trump and while congressional Democrats played politics the president acted for the forgotten men and women of this country as he has done so many times before.”
With more than 60 million beneficiaries, Social Security is funded by a 12.4% payroll tax evenly divided between employees and employers. But there’s a cloud over the program’s long-term finances, and even before the pandemic, government experts estimated it would be unable to pay full benefits starting in 2035. Medicare’s hospital fund is also financed by a payroll tax, but that’s not affected by Trump’s directive.
Social Security and Medicare are seen as politically untouchable. It’s not just that seniors have clout in elections, but the two programs have longstanding inter-generational support.
Trump acted on his own after negotiations with Congress on another COVID-19 relief package broke down. The president has authority to take such limited steps during the national emergency due to the coronavirus.
Trump has also directed Treasury Secretary Steven Mnuchin to work with Congress to forgive the entire amount of the payroll taxes deferred. Otherwise, the tax holiday would become a tax liability for workers when the government comes back to collect the money owed to Social Security.
The whole exercise troubles some nonpartisan experts, who say the bedrock principle of Social Security is that earmarked payroll taxes from employees and their employers pay for earned benefits for retirees.
“This undermines the dedicated funding, which is the foundation of Social Security,” said William Arnone, CEO of the National Academy of Social Insurance, a nonpartisan public policy organization.
Although the White House says the Treasury Department will guarantee that the Social Security Trust Fund is made whole, Arnone said he’s worried because payroll tax collections have already taken a hit this year in the coronavirus economy.
“The question of the reimbursement of the trust fund is not clearly spelled out ,” said Arnone. “It is a big boost in take-home pay for workers, but what is the long-term cost to them if it makes Social Security less stable?”
Under Trump’s plan, workers making below $104,000 a year would get the tax deferral.
But the president’s directive is incomplete because many key details are still not known.
For example, the benefit is limited to workers who “generally” make less than $4,000 every two weeks. However, Trump didn’t define “generally” in his directive to the Treasury. What happens to people who make $4,001?
Economist Eugene Steuerle of the Urban Institute think tank said other practical issues seem to have been ignored.
“It raises all sorts of questions with respect to people who can’t come up with the money down the road to pay back the tax cut,” said Steuerle. That would have to be dealt with if Mnuchin can’t persuade lawmakers to permanently forgive the taxes owed.
Yet there are lots of reasons to think Congress won’t bend to Trump’s will.
It isn’t just Democrats, as the White House suggests. Many congressional Republicans have been cool to Trump’s payroll tax cut.
Lawmakers are loathe to reward the Republican president for trying to change tax policy without their consent and for trying to break the longstanding tie between Social Security payroll taxes and the earned benefit that they are paying for.
Businesses also have misgivings, because the plan would require them to change their payroll systems and could leave them responsible for collecting deferred taxes later on.
How much of a boost to the economy Trump’s plan would provide is a matter of debate.
In a previous coronavirus relief bill, Congress and Trump together gave employers the option of deferring their share of Social Security payroll taxes this year, but it’s unclear how many businesses have taken that up.
A payroll tax break is not a new idea. Congress approved a a temporary cut in the Social Security tax during the Obama years, in the aftermath of the 2007-09 recession. That cut was 2 percentage points.