The Threat to Social Security

Yesterday, President Trump carried out his threat to cut the payroll tax by issuing a directive to the IRS to stop collecting the funds on all wages under $100,000 per annum (about 86% of all wage earners) for the remainder of the year. He also issued a statement saying “If I am victorious on November 3rd, I plan to forgive these taxes and make permanent cuts in the payroll tax. I’m going to make them more permanent.”

This is a serious threat to Social Security and Medicare. I doubt that any of my readers concur with this proposal but if they do, or if they know anyone who does, let me remind you that Social Security “taxes” are not really taxes. These payments amount to legally enforced retirement insurance premiums. They are deposited in a “savings” account in your name in the Social Security Trust Fund1 and are for your future benefit when you retire (not for anyone else). The Social Security benefits paid out to any person are taken from funds that person paid into Social Security during his/her working years. On the other hand, Medicare payments are taxes in that they are used to help pay the healthcare costs of those who have reached the age of eligibility and do not benefit working employees directly. The assumption is, however, that continuance of the Medicare program will ultimately benefit working employees when they reach retirement. In both cases (the one being and enforced savings program and the other being a tax), the average retiree receives, or will receive, far more in benefits than what he/she paid in. In the case of Social Security, there are two reasons for this.

    • First, employers are required to contribute to Social Security and Medicare an amount equal to each employees payments.
    • Second, money in the trust fund earns interest over a long period of time.

In the case of Medicare: on average, your total Medicare payments, accumulated over the course of your working life, will cover only a small fraction of your Medicare benefits upon reaching the age of eligibility – the lion’s share will come from regular income taxes.

There are four reasons why no one should support Trump’s proposal.

    • Stopping or reducing Social Security payments will reduce your Social Security benefits when you reach retirement. (Social Security benefits one receives upon reaching retirement age are directly dependent on the amount of money one pays into it.)
    • Stopping or reducing Social Security and Medicare payments could bankrupt both programs resulting in total loss of future retirement income and healthcare benefits.
    • Stopping or reducing Social Security and Medicare payments deprives each employee of the employer paid contribution which is equal to that of the employee. In the case of cutting the payments entirely, this would be equivalent to a theft of 7.65%2 from each employees total income.
    • Stopping or reducing Social Security and Medicare payments will not support the economy nor will it financially help those who have lost jobs due to the COVID-19 pandemic.

The principal beneficiaries of the payroll tax cut are employers. Employees will receive an additional 7.65% of their salary in the paychecks, but they will lose all of it and more later in their retirement benefits. Employers, on the other hand, will receive and keep a bonus of 7.65% all employee wages that otherwise would have gone to employees’ retirement benefits.3

This is a plan in which employees lose and employers win. It will not create jobs, it will not stimulate the economy, it will not help the unemployed. It will only fatten the wallets of stock holders, corporate executives and business owners.

1 The Social Security Trust Fund has nearly $3 trillion in reserve which is invested in government securities. Some of this money was invested by those of us presently receiving benefits and the rest was invested by people who will receive benefits in the future.

2 6.2% for Social Security and 1.45% for Medicare

3 Any thoughts that employers will turn that money over to employees is purely wishful thinking. Terminating these payments is a windfall profit to employers. Just consider how a corporation like Amazon would benefit from a tax cut amounting to 7.65% of the wages of all employees’ earning less than $100,000 annually.