President Donald Trump claimed he would eliminate the payroll tax if he is reelected — but an analysis by the Social Security Administration found that such a move would cause the Social Security Trust Fund to run out of money by 2023.
Trump recently signed a memorandum that would temporarily stop the collection of payroll taxes, which is a 12.4% tax split evenly between employees and employers that funds the Social Security and Medicare trust funds. Only Congress can cut taxes, however, so the payroll tax savings would still have to be repaid by next year's tax deadline — though Trump said he would push to forgive the deferred taxes if he is reelected.
Trump went a step further earlier this month, vowing not just to forgive this year's payroll tax but eliminate it entirely.
"If I'm victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax. I'm going to make them all permanent," he said during a news conference at his Bedminster, N.J. golf course. "…In other words, I'll extend beyond the end of the year and terminate the tax. And so we'll see what happens."
The claim prompted alarm on Capitol Hill. Senate Minority Leader Chuck Schumer, D-N.Y., Sen. Bernie Sanders, I-Vt., and Sen. Ron Wyden, D-Ore., sent a letter to the Social Security Administration questioning how permanently eliminating the tax and making no other changes would impact the viability of the Social Security Trust Fund.
"While we would not be supportive of this hypothetical legislation, we would like to be aware of its potential implications," they wrote.
Stephen Goss, the chief actuary at the Social Security Administration, told the senators in his response that the hypothetical cut would cause the Social Security Disability Insurance Trust Fund to be depleted by mid-2021 and the Social Security Trust Fund reserves "would become permanently depleted by the middle of calendar year 2023, with no ability to pay… benefits thereafter."
Goss noted that past temporary payroll tax reductions did not affect the trust fund reserves because the Treasury Department authorized automatic transfers from its General Fund, which Treasury Secretary Steven Mnuchin vowed to do for the deferred taxes, but it is unlikely to extend beyond that.
If the payroll tax is eliminated, Congress would have to replace the funds with about $1 trillion in tax increases. Social Security benefits for retired workers average about $1,500 per month, and "these amounts could be completely eliminated" without alternative sources of funding, Forbes reported.
"While benefits scheduled in the law… are obligations, such obligations can only be met to the extent that asset reserves are available," Goss wrote.
Democrats cited the analysis to warn that Trump's promise would "completely decimate Social Security."
"The Social Security Administration has made it clear: eliminating the payroll tax, as Trump has proposed, would bankrupt Social Security and prevent seniors and people with disabilities from receiving the benefits they have earned," Sanders said in a statement. "Defunding Social Security may make sense to the billionaires at President Trump's country club, but it makes zero sense to me. Instead of dismantling Social Security, we must expand it so that every senior can retire with the dignity they deserve."
House Speaker Nancy Pelosi, D-Calif., vowed to oppose any attempt to eliminate the payroll tax.
"The new analysis today shows the swift potential devastation of President Trump's reckless call to 'terminate' the payroll tax: shattering the sacred promise of Social Security," she said in a statement.
Advocacy groups sounded the alarm as well.
"If Donald Trump is re-elected, Social Security will cease to exist before the end of his second term," Nancy Altman, president of Social Security Works, told CNBC in response to the analysis.
Trump's advisers have attempted to walk back his comments.
"There is no plan to eliminate Social Security taxes," top White House economic adviser Larry Kudlow told reporters at the White House. "I don't know where that idea came from. It's not true."
"When he referred to 'permanent,' I think what he was saying is that the deferral of the payroll tax to the end of the year will be made permanent," he told CNN. "It will be forgiven. The tax is not going to go away."
"That isn't what the president said at all," host Dana Bash responded. "He said the opposite."
Social Security advocates are alarmed at the deferral as well, noting that using the Treasury's General Fund undermines how the program is supposed to work.
"They're not a handout. They're not an entitlement," Dan Adcock, the director of government relations and policy at the National Committee to Preserve Social Security and Medicare, told CNBC. "That's why even under those circumstances we are so strongly opposed to this."
It is highly unlikely that Congress would entertain the idea of undermining the Social Security program given that even Republicans opposed Trump's repeated calls to cut the payroll tax temporarily amid the pandemic. "A majority of Senate Republicans didn't want a payroll tax cut," NBC News reported last month.
Analyses have found that two-thirds of the benefits of a payroll tax cut would go to the richest 20% of Americans while the poorest 20% of Americans would get just 2% of the benefits. It would do nothing to help the tens of millions of people out of work.
Trump called for the payroll tax deferral after negotiations with Democrats broke down, but the fate of that deferral is still up in the air.
The memorandum called for the Treasury Department to start deferring taxes starting on September 1, but that appears highly unlikely since the department has not produced guidelines for employers or payroll processors to defer the taxes.
"The deferral isn't going to be in place for September 1st," Pete Isberg, president of the National Payroll Reporting Consortium, the payroll industry's trade association, told The Washington Post.
Because the deferral is voluntary, the language in the memorandum "raises the prospect that you have to get information to 100 million people," Isberg said, and then ensure the tax is only deferred for employees who want it.
About 30 industry groups, led by the US Chamber of Commerce, called the proposal potentially "unworkable."
"Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law," the groups said in a letter to Congress and the White House.
The groups said that the deferral would be "unfair to employees to make a decision that would force a big tax bill on them next year."
"We hope Congress and the Administration come together on a path that supports workers instead of burdening hard-working Americans with a large tax bill next year," the letter said.
Experts say that Trump's order is unlikely to have much impact as a result.
"There's a lot of unresolved questions about the implementation of this deferral, [and] some of the unresolved questions are quite basic," Garrett Watson, a senior policy analyst at the Tax Foundation, told NBC News. "When would the deferred tax be owed back? There isn't a date specified. There are many options here that have to be clarified. The other big thing that's hanging over a lot of this is whether or not this deferral will turn into a meaningful reduction in tax liability owed."
Companies and employees that choose to opt for the deferral could have big headaches come tax time next year.
"You don't want to be in a position where you have to withhold months worth of payroll taxes from employees all at once," Eric Toder, the co-director of the Urban-Brookings Tax Policy Center, told NBC. "That would create a horrible problem for people."