Last week, America celebrated a very special birthday. Back in August of 1935, President Franklin D. Roosevelt signed the Social Security Act into law, establishing what is still the most important social program in our country.
Today, Social Security provides benefits to more than 64 million people, more than 70% of whom are retired workers. Of its nearly 45 million retired workers, 62% lean on Social Security for at least half of their monthly income, with over 15 million retirees pulled out of poverty each year as a direct result of their Social Security income.
In other words, it’s kind of a big deal.
In the program’s current form, Social Security can’t go bankrupt
But the most important aspect of the Social Security program is its longevity; the program just celebrated its 85th birthday. It’s important to recognize that, in spite of its many issues, it is in little danger of going bankrupt.
The secret sauce to Social Security’s success is the fact that two of the program’s three sources of revenue are recurring. Although the interest income Social Security earns on its $2.9 trillion in asset reserves (i.e., its net cash surpluses built up since inception) could potentially disappear in 15 years, as long as the American public continues to work, Social Security will continue generating income from its 12.4% payroll tax on earned income and the taxation of benefits for persons/couples earning over a certain threshold. Together, the payroll tax and taxation of benefits were responsible for 92.4% of all income collected last year for Social Security.
To be clear, survivability and sustainability are two very different things. Based on the Social Security Board of Trustees’ 2020 annual report, the program is facing a $16.8 trillion funding shortfall between 2035 (the year when its asset reserves are expected to be exhausted) and 2094. If and when this roughly $2.9 trillion is gone, sweeping benefit cuts of up to 24% may be imposed on retired workers to sustain Social Security’s solvency for many decades to come.
But when it comes to the simple question of whether Social Security will be there for you in some form when you retire, the answer is a resounding “yes,” as long as you’ve earned the requisite number of work credits throughout your lifetime.
In its current form, Social Security is unbreakable.
Donald Trump’s economic growth plan could kill Social Security
The only way that Social Security’s long-term future would be in any way put into doubt is if lawmakers altered how revenue is collected — and that’s exactly what President Trump has proposed.
Facing unprecedented economic turmoil associated with the coronavirus disease 2019 (COVID-19) pandemic, Congress passed and the president signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27. This $2.2 trillion relief package, the largest on record, provided much-needed funds to struggling industries and small businesses. It also allocated $300 billion in direct stimulus to American workers and senior citizens. To date, more than 160 million Americans have been sent an Economic Impact Payment.
Unfortunately, these payouts haven’t done much for individual taxpayers and their families, which is why negotiations are ongoing between Democrats and Republicans regarding a second round of direct stimulus. With those talks stalled and the Senate on a month-long recess, President Trump took it upon himself to sign a series of executive orders two weeks ago, one of which calls for the deferral of payroll taxes for the remainder of the year (starting September 1 and running through December 31). Deferring payroll taxes implies that workers would be required to repay what was deferred at a later date, though it would boost their take-home pay in the short run.
But this is just the beginning, at least in the mind of Donald Trump. During a recent White House briefing, Trump said of the payroll tax: “On the assumption I win, we are going to be terminating the payroll tax after the beginning of the new year.”
Even though a high-level White House official told Fox Business Network that there have been no discussions about permanently doing away with the payroll tax, the simple fact that President Trump is considering it is terrifying. Removing the payroll tax — the primary funding mechanism of Social Security — would cripple funding for the program.
Some of you might recall that a few years ago, a Republican lobbyist flirted with the idea of replacing the existing payroll tax with a value-added tax (VAT). The problem with a VAT is that it would tie Social Security’s health to that of the U.S. economy, and any prolonged period of recession could wreak untold havoc on the program as consumption declined.
Social Security might not be there for eligible retired workers if Trump were to alter how the program is funded. The White House official did say that they’re considering forgiving the deferred payroll tax — which could also be problematic for Social Security, but isn’t as drastic as permanent elimination of the tax.
Thankfully, President Trump doesn’t have unilateral power to permanently end the payroll tax, nor is it likely that lawmakers in Congress will agree to such a move. With the understanding that ending the payroll tax could kill Social Security, neither Democrats nor Republicans would be in favor of such a measure.
Payroll tax will continue to be collected — and with that, Social Security’s longevity will be secure.