On August 8, at his golf club in Bedminster, New Jersey, President Donald Trump announced that his administration is seeking to delay much of the payroll tax that funds Social Security—1 of 4 unilateral actions he took in lieu of negotiating with Congress on meaningful economic relief legislation. The president also said that if he is reelected, he wants not only to turn the delay into a tax cut that would result in significant revenue losses for Social Security, but also to eliminate employee payroll taxes for good. As our analysis based on the Social Security trustees’ projections shows, eliminating employee payroll taxes along the lines that the president has proposed would, absent additional action, completely exhaust the Social Security trust fund by 2026 or earlier and result in steep benefit cuts.
Social Security is funded by a 6.2 percent payroll tax paid both by employees and employers; this payroll tax goes into the Social Security trust fund.* According to the trustees’ latest projections, the trust fund ensures that Social Security beneficiaries can count on all of their promised benefits until 2035, giving Congress enough time to address Social Security’s longer-term financial shortfall. Currently, 65 million people receive Social Security benefits, including retirees, people with disabilities, widows and widowers, and surviving spouses and children of workers. Most seniors and disabled worker beneficiaries rely on Social Security for a majority of their income. As the pandemic continues to exact a toll on Americans’ health and financial security, Social Security’s guaranteed income is all the more important.
Trump’s August 8 memorandum instructed the U.S. Department of the Treasury to delay the payment of employee-side Social Security taxes on wages paid from September 2020 through December 2020 to workers earning less than $4,000 every other week (roughly $100,000 on an annual basis). Because employers are legally required to withhold employees’ share of the tax notwithstanding Trump’s memorandum, many tax lawyers and payroll administrators have raised doubts about whether employees will see any boost in their paychecks from moving back the tax deadlines; employers may simply continue to withhold tax from paychecks and hold onto the money until the delayed deadline for paying it to the government. Regardless, the Committee for a Responsible Federal Budget has estimated that up to $100 billion in payroll tax revenue flowing into Social Security could at least be delayed under Trump’s action.
Trump has made clear that he wants the tax that is delayed this fall under his unilateral action to be permanently forgiven, which would result in a permanent revenue loss of about $100 billion for Social Security. At the Bedminster press conference, President Trump also stated, “If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax.” Trump doubled down on these comments on Monday, August 10, reiterating, “After the election, on the assumption that it will be victorious for an administration that’s done a great job, we will be ending that tax, we’ll be terminating that tax.”
Cutting Social Security taxes from September through December would hurt Social Security’s finances; permanently eliminating the tax would gut the program. Trump’s proposed payroll tax cut would eliminate about 35 percent to 45 percent of Social Security payroll tax revenue, depending on details not yet known.** This would drain about $350–$450 billion in payroll tax revenue in 2021 and more in later years. This enormous revenue loss would greatly accelerate the exhaustion of the trust fund. Once the trust fund is exhausted, remaining Social Security revenues would fund only a portion of promised benefits, which are already modest. The average monthly benefit for retired workers is now $1,516. The average monthly benefit for disabled workers is $1,259.
Based on the latest Social Security trustees’ projections, we estimate:
- Cutting the tax due for the last four months of this year, as Trump wants, would result in the combined Social Security trust fund being exhausted in 2034 rather than 2035, as under the trustees’ April projections.
- If in 2021, a second-term President Trump permanently eliminates the employee share of the Social Security tax along the lines that he has proposed for his temporary tax delay—limiting it to workers under the wage threshold—the combined trust fund would be exhausted five years later, in 2026, or nine years sooner than the actuaries predicted in April of this year. With the trust fund exhausted, remaining revenues would only be able to pay for 59 percent of promised benefits, and that portion would decline over time. For an average earner who retires at the age of 65, a 41 percent benefit cut in 2026 would be a loss $731 per month, or $8,772 over a year, in today’s dollars.
- Under an alternate assumption of Trump’s policy—permanently eliminating the tax for wages under that threshold, including for workers earning more—the combined trust fund would be exhausted in 2025. With the trust fund exhausted, remaining revenues would only be able to pay for 50 percent of promised benefits, declining over time. For an average earner who retires at the age of 65, a 50 percent benefit cut in 2025 would be a loss of $859 per month, or $10,313 over a year, in today’s dollars.
The underlying projections from the trustees are from April and incorporate little or none of the economic damage wrought by the COVID-19 pandemic and the Trump administration’s failure to contain it. Tens of millions of Americans have lost their jobs, which already means less revenue for Social Security. Many workers infected with the virus could face debilitating long-term health issues that make it more likely that they will need to rely on disability benefits. Cutting Social Security’s income stream is the last thing Americans need right now.
Seth Hanlon and Christian E. Weller are senior fellows at the Center for American Progress.
*Authors’ note: Social Security has separate trust funds for retirement and disability insurance, but they are commonly analyzed as a combined trust fund.
**Authors’ note: Trump’s memorandum specifically calls for a delay in payroll taxes with regard to workers who “generally” earn less than $4,000 per biweekly paycheck (about $100,000 per year), leaving unclear whether the action will apply to wages up to that amount for workers who earn more. Based on the latest wage distribution data, we estimate that employees with annual wages under $100,000 account for about 70 percent of all wages subject to Social Security tax—that is, wages under the wage cap, which is currently $137,700. We estimate that wages under $100,000 per worker, including the wages of those who earn more, account for somewhat more than 90 percent of wages subject to Social Security tax. Seventy percent to 90 percent of the employees’ share of the tax would be 35 percent to 45 percent of the entire tax. Although Trump’s memorandum did not mention self-employment tax, for these estimates we assume that similar rules would apply to half of the tax paid by self-employed workers, who pay both employee and employer shares.