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What Will a Payroll Tax Deferral do to My Social Security?

On August 8, 2020, President Trump signed memoranda and an executive order which included a deferral of the employee portion of the payroll tax for workers making less than $100,000 a year. The orders generated much commentary and inquiry from all sides. Critics raised alarms by claiming that such a move could bring an end to social security benefits both for retirees and for those employed workers still contributing to the system.

What exactly does the memorandum do?

The memorandum regarding payroll tax deferred “the withholding, deposit, and payment of the [employee payroll] tax . . . paid during the period of September 1, 2020, through December 31, 2020 . . . with respect to any employee . . . whose wages . . . payable during any bi-weekly pay period generally is less than $4,000.”

Payroll taxes are comprised of Social Security tax (12.4%) and Medicare tax (2.9%). The employer pays half the tax, and the employee pays the other half (6.2% and 1.45%, respectively).

The March 2020 CARES Act allowed employers to defer their share of social security tax to the end of 2020, giving them to the end of 2022 to pay back the amount deferred. The August 8, 2020, executive order defers the employee side of the payroll tax, but only through the end of 2020; the taxes will be due in 2021. But it is the employer who withholds and pays the employee portion of the tax from paychecks, and it is unclear whether employers are required to pay out deferred funds to their employees, where employers will also be responsible for getting the funds back and paid next year.

While not explicit in the words of the memorandum, in making the announcement President Trump suggested that the deferral could be retroactive to August 1, 2020. In addition, he hoped to forgive the deferred payroll tax and extend or make the cuts permanent if reelected, though that would require action from Congress.

What does this mean for social security benefits?

The President’s critics immediately decried that the action would have a significantly detrimental effect on social security benefits paid to about 64 million Americans. While the deferral and potential forgiveness creates a gap that may be later filled from the general fund, it is unlikely to create an immediate impact on current benefits.

Currently, 85 cents of every social security dollar paid goes into a trust fund that pays benefits to retirees and their families. About 15 cents of that dollar goes into a trust fund to pay benefits to disabled Americans and their families. Less than 1 cent per dollar funds the Social Security Administration.

It is no secret that Social Security and Medicare face long term financing shortfalls. The Social Security Administration Annual Trustees’ Report projects three sets of assumptions to determine the longevity of current funds. The 2020 summary projects that benefits can be maintained until 2034, at which time the trust will be depleted and recipients will face a reduction in benefit to 76%. Under the more conservative “low cost” projection, the fund will remain solvent for the next 75 years.

Will my retirement benefit be reduced?

Probably not, at least not in the near future. Threats to the financial viability of the social security program are not new. In 1982, the OASI (Old-Age and Survivors Insurance) fund, from which retirement benefits are paid, was nearly depleted. Temporary emergency legislation allowed the fund to borrow from other federal trusts, and further legislation re-lined the coffers of the OASI fund. Four years later, the borrowed funds were fully repaid with interest.

U.S. demographics have slowly increased the drain of OASI reserves, with payments out to baby boomers exceeding contributions to the fund, as the worker pool and birth rate have decreased. The spike in unemployment due to COVID-19 could also have a significant impact on long-term viability of the fund, as massive job losses decrease the amount paid into the system.

Do social security retirement benefits face a looming crisis? Yes. But again, that is not new, and there are several theories on ways to put the “security” back into the future of social security. Federal legislation, short or long term, is likely to keep the fund in the black until such time as a new theory of funding the OASI fund gains traction.

Social security was never intended to be the only source of income for retired workers. But it has become a much-needed and much-appreciated source of retirement income for most Americans. It is highly unlikely that social security would be eliminated or that Congress would fail to act to protect this important income for its constituents. As Dwight D. Eisenhower wrote, “should any political party attempt to abolish social security, . . . you would not hear of that party again in our political history.”