Defunding Social Security? Highly Unlikely

by | *Financial Awakenings, Retirement Planning | 0 comments


I received this email from a long-time retired reader. “I’ve been reading a lot of stuff that says we may not have Social Security income before too long. This concerns me, of course—if my partner loses his Social Security as well as his federal retirement and I lose my Social Security, there goes half of our income. I’ve been hearing this all over the place on ads for various political races and from my friends on Facebook. After hearing this over and over, one starts to wonder if there is any merit to it.”

She was certainly scared and concerned, which is understandable given what she had heard. Assuming she must be reading this from some fake news, rag-tag Facebook post by the Chinese or Russians, I asked for her source.

She responded with a link to an August 26, 2020, article in Forbes by Erik Sherman, “Yes, Trump’s Proposed Permanent Tax Cut Would Gut Social Security By 2023.” Forbes is not typically a journalistic source running unsubstantiated extremist propaganda.

It took me less than a minute to put the pieces together. The story is technically true, but pragmatically improbable. It’s a great example of why it is often so hard to figure out what the truth is.

Here are the facts. Trump issued an executive order allowing (not requiring) companies to defer collecting payroll taxes, also known as the FICA tax, from September 1 until December 31, 2020. This tax is 12.4%, with half paid by the employer and half by the employee on income up to $137,700. Its purpose is to fund Social Security.

Since inception, the payroll tax has collected more in taxes than it needed to fund Social Security benefits. The surplus was “loaned” to the US Treasury, which used the money to pay general expenses. The idea was if the amount needed to pay benefits ever exceeded the income, the fund would start calling in the loans (the surplus or bonds) it was owed by the Treasury.

The income is currently about equal to the outgo needed to pay benefits. According to the Forbes article, during 2019 Social Security took in $1,061.8 billion and spent (mostly in benefits payments) $1,059.3 billion, leaving a positive balance of $2.5 billion for the period. So, the cost will start exceeding the revenue in 2021, with the surplus projected to run out in 2035.

Trump has promised if reelected, he will work to try and make the deferral a permanent tax cut. That means Social Security’s income would stop completely. Sherman states that the Office of the Chief Actuary at Social Security projects the fund would spend down its reserves by mid-2021 and could no longer fund “regular retirement benefits” by mid-2023

Ok, what would it take for a permanent elimination of the payroll tax to have a chance of happening? The same party—more likely Republicans than Democrats—would need to control the Presidency, Senate, and House.

Toward the end of his article, Sherman mentions, almost offhandedly, “Could the scenario happen? Certainly, if Trump were reelected and Republicans both kept control of the Senate and regained it in the House.”

Take that in for a minute. This would require Trump to be reelected President, the GOP to retain the Senate (somewhat unlikely), and the GOP to flip the house and regain control of it (highly unlikely). This “perfect storm” or “miracle,” depending on your political views, has about the same probability of happening as your winning the Mega Millions jackpot. That chance is one in 302,575,350.

An end to Social Security funding any time soon is not a scenario to lose sleep over.

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