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Biden Claims Trump Has ‘Planned Cuts To Social Security’ By Killing The Payroll Tax. What Are The Facts?

Elizabeth BauerSenior Contributor
Retirement
I write about retirement policy from an actuary's perspective.


CHARLOTTE, NORTH CAROLINA – AUGUST 24: U.S.[+]
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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,  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!

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Elizabeth Bauer

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Does the recent fall in the market worry you? Depending on your age, it shouldn’t. If you’re a millennial, there’s something else that should worry you more. The good news, though, is that it’s something you have total control over.

If you’re like most investors, you read the results of the market every day. In fact, the larger your investment account, the more attention you pay to the market.
In all likelihood, the biggest investment account you own is your retirement account. If you’re invested for the long-term, your retirement account will go up and down with the market. Because of this, it’s common for someone in your position to want to learn more about investments and how to measure them.

Don’t bother. You can’t control the market. Focus instead on something you have the power to make a difference in.
“Investing metrics don’t matter unless there is money to invest,” says Jennifer Ellison of BOS, a wealth management firm in San Francisco. “Without saving, investment metrics make no difference. But once you begin saving, it is very important to let investments do the work over time.”

Time is the key factor here. The more time you have to save until retirement, the less concerned you should be with investments. While day-to-day fluctuations can exhibit wide swings, the markets tend to produce a reliably consistent range of returns over long periods. Smart retirement savers know how to take advantage of this reality.
“Time in the market matters more than timing the market or trying to pick the next Apple AAPL or Amazon AMZN,” says John Madison, Financial Counselor at Dayspring Financial Ministry in Ashland, Virginia. “Historical returns show us that investing early and at regular intervals provides better long-term results, regardless of the specific allocation chosen. Savers can’t control much in the investing process, but they can control when and how often they invest.”

The key to success when it comes to achieving a comfortable retirement rests within the three factors you have authority over.
R. Brad Knowles, Managing Director of Heritage Retirement Plan Advisors in Oklahoma City, says, “For most people, there are only a few elements you can control in retirement: how much you save, how long you save, and when you retire. You cannot invest your way to a successful retirement. You can only save your way there.”

Think about the nature of “saving” versus that of “investing.” In particular, what do these two terms mean to you? With a little thought, you can quickly see that “saving” involves your behavior while “investing” relies on the behavior of others.
“In most cases, people have more control over their own habits and choices than they do over this inanimate object we call ‘the investment markets,’” says Rob Isbitts, Co-Founder of TheHedgedInvestor.com in Weston, Florida.

The trick, then, is to discipline yourself so your behavior places you in the advantageous position of making the most out of time. And there is no better time to grasp the power of “time” than right now, no matter what your age.

“In general, the earlier you start, the longer you have for money to compound,” says Ken Van Leeuwen, Managing Director & Founder of Van Leeuwen & Company located in Princeton, New Jersey. “The length of time for the investment dictates how much you need in return in order to achieve the goal.”

There are millions of excuses for holding back on contributing to your retirement plan. In the end, such procrastination could end up costing you millions.
“There’s no way to ‘make up’ for multiple decades of low or delayed savings,” says Ryan McPherson, Director of Coaching and Advising at SmartPath in Atlanta.

If you want to know the secret, it’s as simple as this:
“Time is a savers best friend, and most savers have a clear-cut plan,” says Craig Borkovec, Financial Advisor at Miracle Mile Advisors in Los Angeles. “The longer you have to save, with a correct plan, the greater your chances are of taking advantage of return potential the stock market can offer you.”
When you start contributi
ng, how much you contribute, and how long you contribute for; these are the three levers you have the power to pull. All else is outside your grasp. 

 and accepting this will also help you sleep better at night.

“There’s a lot in life and financial planning that you cannot control, that makes it so important to control what you can in order to achieve your goals,” says Kyle Westhaver, Financial Advisor at Nicola Wealth in Toronto, Ontario, Canada.

It’s important, therefore, you don’t succumb to the temptation to become an expert in investments (unless it’s your day job). Become an expert in the aspects you can take action on.
“These are metrics that a retirement saver has direct control over,” says Michael Clark, Managing Director & Consulting Actuary in Denver. “The likelihood of someone having enough money for retirement increases dramatically when an investor starts earlier, saves longer, and contributes more.”
You dream of living a comfortable retirement, yet find yourself fretting over the unknowns of the distant future. Allow that distance to work for you, not against you. You command the strings. Pull them in the direction that moves you closer to your goal.

“Time is the number one factor for the best retirement plan, and one that most investors ignore or do not understand,” says Curtis Ray, CEO of SunCor Financial in Gilbert, Arizona. “How much money you can set aside in a secure place and then allow time to enhance the compound interest inside, is a guaranteed path to wealth for anyone who gives their money enough time to work.”

Do you recall the lesson from the fable involving the tortoise and the hare? In modern times, the hare would be more concerned with investing. The tortoise would be more concerned with saving.

Remind yourself again which critter won.

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