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Aug. 21, 2019, 8:02 a.m. EDT

Social Security is already in trouble — and a payroll-tax cut might only make it worse

The Obama administration approved a similar plan in 2011 and 2012 but reimbursed the program

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By Alessandra Malito, MarketWatch


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Social Security is already in trouble, and a payroll-tax cut may make it worse.

The White House is considering a payroll-tax cut to boost the economy by giving Americans a few more dollars in their paychecks — but the proposal could also take money away from Social Security beneficiaries in the future.

A temporary payroll-tax cut could be a way to put more money into consumers’ paychecks ahead of the 2020 presidential election, even as concerns about the economy and a trade war with China weigh on the stock market and business and consumer confidence.

President Trump said Tuesday his administration is looking at tax cuts, including cutting payroll taxes, although maintained the economy is still robust. “Payroll taxes is something I have been thinking about,” he said.” Many people would like to see that.”

This notion of a cut to the payroll tax as a way to mitigate economic decline was first reported Monday by the Washington Post .

The payroll tax helps fund programs including Social Security and Medicare. Few details have been shared regarding this possible plan, but a simple analysis a cut to the employee side of the payroll tax would result in a $70 billion to $75 billion annual cost to the government per percentage point cut, according to the Committee for a Responsible Federal Budget, a bipartisan public-policy think tank in Washington.

See: Should we be worried about Social Security going bankrupt?

Many factors could change the cost to Social Security, including the percentage to be cut, how long the cut would last, and whether it was on the employer or employee side or both, said Marc Goldwein, senior vice president and head of policy at the CRFB.

Social Security is already in turmoil. The two trust funds that support the program are expected to run out of reserves by 2035, and if that happens beneficiaries will get only 80% of the benefits they’re owed, according to the Social Security Administration’s trustees report. The SSA estimates the program will face a gap between promised benefits and projected income over the next 75 years. While many experts say Congress likely won’t let that happen, lawmakers have yet to craft or vote on any solution.

About 35% of taxes sent to the federal government are considered payroll taxes, funding, in addition to Social Security and Medicare, the unemployment insurance program and retirement programs for federal and railroad workers, according to the Peter G. Peterson Foundation, a nonpartisan policy organization focused on the country’s economic future . It is unclear whether and how a reduction in the payroll tax would impact these additional programs.

The Obama administration approved a payroll-tax holiday in 2011 and 2012 in an attempt to buttress an economy climbing out of the financial crisis. The cut was 2% for two years, and would have cost the equivalent of $300 billion today to Social Security. The general budget reimbursed the program for its losses, but that reimbursement added to the nation’s debt.

If the Trump administration were to adopt the same policy — a 2% cut for two years — Social Security’s expected 75-year shortfall would expand by 3% in the next 75 years. The shortfall for the 2020-21 fiscal year, however, would triple, Goldwein noted.

“A big risk associated with a payroll-tax holiday like this is [that] you put it in effect and then it’s hard to unwind,” Goldwein said.

Also see: Want to get what you’re owed from Social Security? Do this

Americans wouldn’t feel much of a difference immediately, Goldwein said. The trust funds are expected to run out of money in the next 16 years, but this temporary tax holiday could advance that date by a few months or even years depending on numerous undisclosed factors.

“If you took 2% from that, benefits would just automatically get cut eventually,” said Nancy Altman, president of Social Security Works, an organization dedicated to maintaining and expanding Social Security. Having the general budget reimburse the program would avoid this outcome, but that would ramp up the deficit, she added.

Such an approach could have a long-lasting effect on the program and its beneficiaries. Although the Obama administration ended the payroll-tax cut after two years, there were proposals to keep extending it year after year. Continuing a tax holiday permanently would increase the Social Security shortfall by 70%, Goldwein said.

“That’s the biggest risk,” he said. “You [intend] it to be temporary, and it becomes permanent, and in that case it’s extremely costly.”

Alessandra Malito is a personal finance reporter based in New York. You can follow her on Twitter @malito_ali.

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