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Facts on the Payroll Deferral and Social Security

September 11, 2020
Facts About the Payroll Tax and Social Security
by Region 8 Webmaster John Davis

Recently President Trump issued an executive order to defer payroll taxes until next year. He also stated if he is reelected then he would work to end the payroll tax. This move would seriously damage Social Security and jeopardize the future of the program.
In 1935 President Franklin Roosevelt signed into the Social Security Act. The purpose of the law was to provide retirement security for citizens who reach retirement age. Later on the law was expanded to provide income security for disabled Americans. Social Security is the term used to identify the federal program Old-Age, Survivors, and Disability Insurance (OASDI). As with any insurance program, it operates on the premise of shared risk between the participants.

Social Security is designed to offer income security through payments to people over the age of 62. Everyone who pays into the system qualifies for benefits once they reach their eligibility based on a sliding scale depending on when you were born. Social Security is a pay as you go system, with a larger number of people paying in than those drawing, requiring lower contributions from those who pay the tax.

Social Security is paid for using Federal Insurance Contributions Act tax (FICA), a payroll tax that all workers who are in the system pay. Workers pay 6.2% in taxes to Social Security on the first $137,700 they make and 1.45% to cover Medicare. Employers match the contribution made by employees, equaling 15.3% of your salary to funding the system that has provided retirement income security for generations. Self-employed people can also participate in the system through personal contributions; however they lack the matching contributions from an employer.

In 1965 Medicare health insurance was added to Social Security. A tax of 0.7% was added (included in FICA) to fund the cost of the program. The combination of Social Security and Medicare has dropped the poverty rate from those 65 and older from 40% in the 1930 to 10% today. Of all the government programs ever enacted, Social Security and Medicare are by far the most successful.

From the onset Social Security has collected more benefits than were paid out. This built a surplus of money which became the Social Security Trust Fund. Following World War II there was an expansion of the population we know as the baby boom. This created a situation where the number of people drawing Social Security expanded greatly beginning in the early 2000’s.
Throughout the history of Social Security there have been 11 years where the annual contributions to Social Security did not cover the pay out to retirees. The Trust Fund is used in those situations to cover the monthly benefits.

Social Security estimates that should the Trust Fund be depleted, the revenue from FICA would cover 69% of the current benefit cost. In 2019, there were about 64 million people receiving payments from Social Security. Of that 48 million were retirees, 6 million were spouses of deceased workers and 10 million were disabled. Last year 178 million people made Social Security contributions through the payroll tax and Social Security posted a net gain of about 3 billion dollars. The most recent report from Social Security estimates the stress of the baby boomers on the program to be reduced by 2042 as that generation is replaced with a group of workers who will work longer before being eligible to draw, allowing the program to management payments easier.
So, the payroll tax break President Trump has enacted cuts funding to Social Security. He has also said if he is reelected he will abolish the tax all together. First off the President doesn’t have the constitutional right to end the tax. Only Congress can do that, but he has instructed the Secretary of the Treasury to proceed with the plan. The order gave companies the right to choose if they wanted to participate, but not workers. He did force the military to stop the payroll tax.

Should the payroll (FICA) tax be dissolved permanently, then funding for Social Security would end- period. Currently Social Security estimates the Trust Fund will be depleted in 2035, allowing the agency to only pay 79% of promised benefits. However, experts agree that should the payroll tax be eliminated, the Trust Fund would be gone in 2023. Treasury Secretary Steven Mnuchin has been quoted as saying the Federal Government will replace the funds. But, that would increase the current budget shortfall by just under a trillion dollars.

It is important to remember that contrary what Senate Majority Leader Mitch McConnell says, Social Security plays no role in the current budget. All payroll taxes are pass-through funds meaning they are collected and go directly into the Old-Age, Survivors, and Disability Insurance (OASDI) fund which operates independent of the federal budget. Social Security doesn’t owe any money to the federal government but the federal government DOES owe money to Social Security. Over the years the federal government has borrowed money from the Social Security Trust Fund. Of the current national debt, about 3 trillion dollars is owed to the Social Security Trust Fund. As a matter of fact, the Social Security Trust Fund holds the largest single portion of the national debt. Yes the largest portion of the national debt isn’t owed to China or Japan but America’s retirees.

At this time there is a lot of misinformation being tossed around discontinuing the payroll tax and what it would mean. Make no mistake about it- ending the payroll tax would mean the end of much of the monthly income for 64 million retirees and disabled Americans. Not to mention the current 178 million workers who are paying into the system who are owed future Social Security benefits. It should concern every working class American and with good reason. Demand better out of elected officials and make sure they are required to continue to fund the system that allows our senior citizens to have income security and health care in their golden years.

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