An executive order that lets employers defer their employees’ portion of Social Security taxes into 2021 will give some workers a substantial boost in their paychecks in the final four months of this year.
This temporary and optional deferral will have little, if any, impact on Social Security’s finances because any deferred taxes would have to be paid back in 2021.
While deferred payments could cost the Social Security trust fund (which holds about $2.9 trillion of intergovernmental IOUs) up to $778 million in interest, this would shorten Social Security’s solvency by a mere six hours.
This is not to say, however, that the trust fund will emerge the COVID-19 pandemic unscathed.
Before the pandemic hit, Social Security was on track to run out of funds in 2035. COVID-19 will likely hasten insolvency by at least one year and potentially more.
We’re at the point now that even current retirees will be affected by the 20% to 25% benefit cuts that would come with Social Security’s insolvency.
Uncertainty about Social Security exacerbates the economic hardships and insecurity caused by COVID-19.
Preventing benefit cuts through higher taxes or debt will be more difficult now that COVID-19 spending has added about $2.8 trillion to the national debt.
The debt level at early $27 trillion, the equivalent of $207,000 per U.S. household, raises the risk of a fiscal crisis that would make it difficult to prevent cuts to Social Security benefits.
Even as COVID-19 highlights the importance of a stable retirement income, it also has shed light on Social Security’s fundamental flaws.
Many Americans lack savings that could have helped them weather the pandemic. At least in part, that’s because Social Security takes so much from workers’ paychecks that it’s hard to save for a rainy day and for big things like children’s education and retirement.
That wasn’t supposed to be the case. When Social Security began, it took 2% of workers’ paychecks and promised never to take more than 6%. Today, it consumes 12.4% of workers’ paychecks and would need to rise to 15.5% to prevent benefit cuts.
Yet despite its increasing size and tax burden, Social Security has become a progressively worse deal for workers. That’s because every dollar of payroll taxes goes immediately out the door to pay benefits, stripping workers of the positive return they could earn through their own savings and investment.
For someone making just $20,000 a year, that’s $4,300 in lost retirement income each year compared with what Social Security can provide.
But Social Security’s growing size and scope isn’t just a bad deal for individuals; it’s bad for the economy as well.
The Penn Wharton Budget Model estimates that a smaller, better-targeted Social Security program would increase gross domestic product in 2049 by 5.3% while a larger program would reduce GDP by 2.0%.
Seven other models reviewed by the Congressional Budget Office also found that reducing Social Security’s size would boost the economy by encouraging people to work and save more.
Policymakers can create a smaller, better-targeted Social Security program by gradually shifting to a universal benefit structure, which would increase benefits for lower-income workers and reduce them for middle- and upper-income ones (protecting benefits for anyone near retirement).
Combined with common-sense reforms like using a more accurate inflation measure and linking Social Security’s eligibility age to life expectancy, the program would remain solvent and payroll taxes would decline over time.
Lower payroll taxes would help empower households to make choices throughout their lifetimes based on what’s best for them and their families instead of what policymakers in Washington decide.
Acting now to ensure Social Security’s viability would also help restore confidence in the U.S. economy and put Americans on a more sound financial footing for the future.
This piece originally appeared in the Washington Times