Biden Claims Trump Has ‘Planned Cuts To Social Security’ By Killing The Payroll Tax. What Are The Facts?
Last week, I objected to Kamala Harris’s claim that Trump’s plan would cause Social Security checks to “stop coming.”
Now, the Biden campaign itself has a commercial, with Biden-approved text:
“The Chief Actuary of the Social Security Administration just released an analysis of Trump’s planned cuts to Social Security. Under Trump’s plan, Social Security would become permanently depleted by the middle of calendar year 2023. If Trump gets his way, Social Security benefits will run out in just 3 years from now. Don’t let it happen. Joe Biden will protect Social Security.”
I can’t even begin to say how false this is.
The Chief Actuary did not “release an analysis of Trump’s planned cuts.” They responded to a request by Senate Democrats to evaluate a hypothetical scenario in which payroll taxes were eliminated without replacement. But Donald Trump has said, of his proposal to eliminate payroll taxes, “That money is going to come from the General Fund.” In other words, it will be funded by the same set of revenues and borrowed money as every other sort of expense of the federal government that doesn’t have a dedicated revenue source.
In other words, he has no “planned cuts.” And “if he gets his way,” Social Security benefit checks will continue to arrive as usual.
But that doesn’t mean that it’s a particularly smart plan, and it would be very easy for Trump’s opponents to attack his plan to “fund Social Security through the General Fund” while still stating plainly what Trump’s proposal actually is.
After all, FICA taxes amount to 6.2% each for employers and employees for Social Security, and 1.45% each for Medicare.
As far as Social Security is concerned, that’s 97% of the amount needed to cover benefits; in 2035, the year of trust fund depletion as calculated before the pandemic, FICA taxes are forecasted to be sufficient to cover 80% of benefits, according to hte most recent Trustees’ Report. Expressed another way, pre-pandemic, the federal government spent one trillion dollars on Social Security benefits in 2019, which amounted to 4.9% of GDP or 23% of the total federal budget. Is it sensible, is it reasonable to add another $1 trillion to the deficit each year? What about $1.5 trillion, the forecasted cost in 2030?
It seems insane to even contemplate it, Trump’s claim that it’s feasible because we’ll have “tremendous growth” notwithstanding. Yesterday, the CBO updated its projection of the ultimate budget deficit for 2020: $3.3 trillion. Yet the latest Pew poll shows a drop in the proportion of Americans who are concerned about the budget deficit: from 55% in 2018 to only 47% in 2020. And Americans clamored for “second stimulus checks” over the spring and summer (over six million hits on this search, specifying that exact phrase), and the vice presidential nominee Kamala Harris sponsored legislation for up to $10,000 per family per month in “stimulus” cash benefits.
But, that being said, yes, removing the FICA tax as a funding source for Social Security, and shifting the program to the general federal budget requires an increase in tax revenue of some fashion or another. Boosting income taxes would do it fairly straightforwardly, though, of course, we’re talking about 12.4% of capped payroll that needs to be made up for somehow. To give some sense of scale, recall that the Trump tax cuts (the Tax Cuts and Jobs Act cuts) that proponents praise as a boon to the economy and opponents deem a giveaway to the rich, reduced tax revenue by as much as $1.9 trillion (in the interpretation of the law’s opponents) — but that’s as measured over 10 years. In order to fund just this year’s Social Security — before any of the increases over time due to demographic changes — we’d need a tax hike that’s five times the magnitude of the TCJA tax cuts.
Now, that doesn’t mean it’s a bad idea. After all, in one annual ranking of retirement systems, the second and third-ranking countries, Denmark and Australia, do exactly that: they fund their Social Security benefits through their ordinary taxation rather than a dedicated payroll tax. This eliminates all the arguments about whether the earnings ceiling is set at the right level, whether there should be surtaxes to make up deficits, whether some people should have their investment earnings taxed as well — we get to stop arguing about all of this.
But here’s what’s also important to understand about Denmark and Australia: their Social Security benefits are “basic income”-type benefits, rather than calculations based on workers’ earnings over their lifetime. In Denmark, the basic benefit provided by the government is only 18% of average pay. There are extra means-tested benefits to double this amount, and further supplementary benefits for hardship cases. In Australia, the entire government-provided “age pension” is a safety net benefit, with a maximum of AUD 23,824 for singles and AUD 35,916 for couples (USD 17,392 and 26,219), but is means-tested against any sort of income or assets. (See OECD’s Pensions at a Glance for all manner of summaries of pension systems.)
And these are not their only sources of retirement income.
In Denmark, 85% of workers are covered by workplace retirement benefits — and not merely the ability to join a 401(k) and save, themselves, but with substantial direct contributions from employers, and annuity purchase at retirement. This isn’t just because of the collective goodwill of employers, but due to widespread collective bargaining agreements. (There’s also a peculiar program called the ATP, in which everyone pays the same flat contribution to buy into a nationwide deferred annuity.)
In Australia, employers are required to contribute 9.5% of employees’ pay to what amounts to their version of a 401(k) plan — they call it a Superannuation fund. That rate is scheduled by law to gradually increase to 12% in 2027. (Yes, everyone knows that this is not “free” money but forgone pay increases.) To help small businesses, a clearinghouse has been set up by the government to simplify the administrative work.
Are we ready to make this change, to figure out a universal retirement account system that’s fair, that over-burdens neither workers nor employers, that keeps expenses low without calling in the government to get into the Retirement Plan Administrator business or making guarantees? Then, by all means, let’s reform Social Security.
As always, you’re invited to comment at JaneTheActuary.com!