Trump’s Payroll Tax Deferral Raises Concerns on Social Security

The Treasury Department has yet to deliver formal guidance on the deferment. 

Social Security celebrated its 85th birthday last week, but potential tax changes, including President Donald Trump’s payroll tax holiday, have the potential to shorten its lifespan, financial industry sources say.

Stein Olavsrud, executive vice president at FBB Capital Partners, says the economic contraction caused by the COVID-19 pandemic, high levels of unemployment and the potential for Congress to pass legislation making the tax deferral permanent could significantly shorten the depletion date. But, he tells PLANSPONSOR, “as the executive order stands now, this action will have limited long-term impact to Social Security.”

Trump’s order also directs the Treasury Department to look into how the government can forgive the deferred payments. While Trump does not hold the power to forgive payroll taxes, Congress does. Olavsrud says he believes it is unlikely Congress will forgive these taxes ahead of the election in November, but doing so would add a significant strain on the solvency of Social Security. “It is certainly possible that Congress may sign a bill to forgive these taxes,” he adds. “Assuming they sign this into law, it most certainly has an impact on the solvency of Social Security.”

Payroll taxes are shared by the employer and employee, each paying 6.2% of wages along with a 1.45% tax for Medicare. The executive order signed by Trump allows a delay in taxes to Social Security from September 1 through December 31 for employees making less than $104,000 a year, but still requires employers to pay their portion.

The Treasury Department has yet to deliver formal rules on navigating the deferment, adding concern for employers that refuse to withhold their share of taxes. “It will be difficult for employers to act until the Treasury Department provides further guidance,” Olavsrud says. Treasury Secretary Steven Mnuchin said that while he encourages employers to withhold the taxes, he cannot mandate that they do so.

An analysis by Akerman LLP states it is currently unclear whether the IRS may calculate interest and penalties for deferred amounts. Without an additional extension or cut, workers would presumably have to reimburse the deferred tax at the start of 2021. In a statement, Senator Ron Wyden, D-Oregon, ranking member of the Senate Finance Committee, explained how the delay creates a liability for employers and workers.

“While employers are unlikely to risk a massive tax liability by not collecting payroll taxes or having to double up collection later, if they do go along with this stunt, it would drain the Social Security trust fund,” Wyden said. “This fake tax cut would also be a big shock to workers who thought they were getting a tax cut when it was only a delay. These workers would be hit with much bigger payments down the road.”

A move by Congress to forgive these taxes altogether would put another 6% to 7% of an employee’s wages back into their pocket, potentially leaving room for savings, including retirement savings. In a webinar hosted by the American Academy of Actuaries, Rachel Greszler, a research fellow in economics at the conservative think tank the Heritage Foundation, suggested American workers can thrive on their own savings rather than government assistance programs. Accessible savings can lead to larger retirement incomes, build transferable wealth for low-income households and increase net savings, investments and productivity, she said.

However, as the payroll tax is Social Security’s primary revenue source, a complete cut could result in damaging effects for current or pre-retirees. According to Greszler, 42% of retirees rely on Social Security for half of their income or more.

There’s already uncertainty about how much longer Social Security will last in its current form. The Social Security Administration estimates the benefit will deplete by 2035, but the Penn Wharton Budget Model, a tool from the University of Pennsylvania that measures the economic impact of national budget policies, claims recent impacts due to COVID-19 will shorten the projected depletion to two to four years earlier. Stephen Goss, the chief actuary of the Social Security Administration, approximates benefits will be payable in full, and on a timely basis, until 2037.