On August 12th, Trump made a campaign promise to change Social Security and Medicare drastically. In the White House briefing, Trump said that immediately after he wins re-election he was going to eliminate the payroll taxes which fund Social Security and Medicare.
To pay for this, Trump promised to fund Social Security and Medicare from the general budget fund (discretionary money) and no longer from dedicated trust funds (non-discretionary.)
Unless at least $1.7 trillion in new annual taxes is raised, Trump’s campaign promise to end payroll taxes will jeopardize and possibly end Social Security and Medicare. As Trump promised, making Social Security and Medicare payments from the general fund will double the federal discretionary fund in order to maintain benefits at their current levels.
These two programs are currently paid for out of dedicated federal trust funds. Eliminating the dedicated trust fund means all the funding would fall under discretionary funds leaving Congress to determine how to pay for them each year. To keep Social Security and Medicare benefits the same, along with all other discretionary programs, majorities of BOTH the House and Senate would have to vote in favor of $1.7 trillion in NEW TAXES and override a possible presidential veto. Otherwise, Congress would have to slash benefits to many discretionary programs, including Social Security and Medicare.
In Fiscal year (FY) 2019, Social Security (source ssa.gov) was the largest single program in the federal budget at $1 trillion and represented 23% of the total federal budget. In December 2019, 45 million retired workers received an average Social Security check of $1,503. Many of these people depend on Social Security for their basic needs, and it could jeopardize their income if Trump’s promise to end payroll taxes comes to fruition.
In FY 2019, Medicare was the second largest program after Social Security at $644 billion and represented 14% of the total budget.
Social Security and Medicare account for 37% of the total federal budget. This amounted to $1.644 trillion in FY 2019. To put this in perspective, the national defense budget amounted to $686.1 billion or 15% of the total federal budget in FY 2019.
After ending payroll taxes, Trump said that he was going to protect these programs by paying for them out of the general fund. This would shift these programs out of required spending (non-discretionary) and into annual discretionary spending.
Why is that important? If they take it out non-discretionary funding and put into discretionary spending, Social Security and Medicare authorization will then have to go before Congress every year to approve funding. Seniors would not be able to count on Medicare coverage. Seniors and other recipients who rely on their monthly Social Security checks could no longer count on them.
Trump also said that after his re-election he was going to forgive the deferred payroll taxes that he had signed an executive order for back on August 8th. This would further cripple existing Social Security and Medicare trust funds.
Four Democratic Senators sent a letter to the Social Security Administration asking for an analysis of the impact of terminating federal payroll taxes. They received a response from the Chief Actuary of the Social Security Administration, Stephen Goss, on August 24, 2020. The analysis used January 1, 2020 as the termination of the federal payroll tax. The actuary warned that without another source of revenue in place, the DI (disability insurance) portion of Social Security would run out of money in six months and the OASI (Old Age and Survivor Insurance) portion would run out in two-and-a-half years.
According to the 2019 FY budget for Medicare, there may be less than a year before these funds would be depleted under plan to the eliminate payroll taxes without another revenue source in place.
Trump has not said what new or expanded taxes he would generate to cover the $1.7 trillion annual cost. Without payroll taxes, Social Security and Medicare would be renegotiated by the House and Senate every year, which would open up both programs to a Pandora’s box each year.
The Risk for Social Security.
Every year, Congress would have to pass spending bills and make adjustments to existing benefits. Social Security checks could go up, down, stay the same or completely stop depending on the decisions of the majority of Congress and the president. This reauthorization would go before Congress every year.
The Risk for Medicare.
Annually, Medicare would also be opened up to changes in what it covers and what percentage the government would pay for medical bills. Currently, regular Medicare covers 80% of doctor visits and other services. Patients pay the remaining 20% out of pocket or through a supplemental Medicare private insurance plan.
Congress could reduce the government’s share of this coverage to 10% or 20% or any amount of their choosing, with the remaining balance falling on the shoulders of seniors. Congress could also eliminate Medicare programs by choosing to not fund them.
Changes in Social Security and Medicare qualifications and benefit amount.
There are 2 issues that would need to addressed by Congress.
First: Who qualifies?
Currently, Qualification for both Social Security and Medicare requires 40 quarters of minimum payments to Social Security and Medicare trust funds. (The minimum payments depend on dollar minimums set each year by Congress.) Once these quarters are complete, someone can apply for Social Security at age 62 and someone can apply for Medicare at age 65.
If you have less than 40 quarters now, you can continue to work until you qualify. Under the new process, Congress would have to decide who qualifies for Social Security and Medicare.
What happens if you have less than 40 quarters after Social Security and Medicare payroll taxes are terminated? The 40 quarters requirement would become obsolete. If a person has not yet qualified for the 40 required quarters, the individual could never qualify. If Congress waives the requirement, this opens up the question of how to determine who will get paid Social Security and how much will they get paid?
Second: How will Congress determine the amount of your benefits?
Under our current system, Medicare pays the same for any qualified recipient, regardless of income.
Calculation of Social Security benefits is more complicated. Once the minimum 40 quarters of qualifying FICA taxes are paid, a retiree can apply for social security benefits at age 62 or older. (Benefit payments are smaller when taken at the earlier ages.)
Social Security benefit amounts are allocated based on cumulative payroll taxes. Benefits are determined by how much you’ve paid into Social Security during your work life.
If the changes proposed by Trump take place, this monetary benefit would no longer be determined by what you’ve paid into Social Security.
Without money being paid into Social Security Trust Fund from your paycheck, Congress would decide how much your social security check would be or IF you would receive a check at all. Without these qualifying tax payments, benefits could no longer be calculated on a sliding scale. Seniors and others currently receiving Social Security would have to be grandfathered in to keep their payments the same.
It would be up to Congress to decide how payments are determined and who qualifies. They could determine that everyone who qualifies be paid the same amount for retirement, disability and survivor benefits. Or they could make some other determination.
Who benefits most from eliminating the payroll taxes?
Companies would benefit substantially because they have been paying the employer side of the payroll tax for their employees. This would be very beneficial to companies with low-paying jobs and a labor-intensive business. The self-employed would have the greatest benefit since they pay both employer and employee payroll taxes.
If Social Security and Medicare funding from payroll taxes are eliminated, Wall Street and banks would benefit substantially by the increased money available to invest in stocks and bonds. This, however, would not benefit senior citizens because Social Security provides lifetime benefits not only for the retired but also for spouses who have never worked and dependent children.
In summary, eliminating payroll taxes benefits big business and Wall Street while potentially reducing or removing benefits to seniors and qualifying individuals.
How does Trump plan to replace the lost $1.7 trillion from payroll taxes? What is Trump’s plan for insuring benefits remain the same? These questions need to be answered before payroll taxes are eliminated.
NOTE: Supplemental Security Income (SSI) is not part of Social Security. However, it is administrated by the Social Security Administration. It is funded out of the General Appropriation Fund. SSI is designed to help aged, blind, and disabled people, who have little or no income. It provides cash to meet basic needs for food, clothing, and shelter.
Retired Senior Economist for The Commerce Department
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