The Payroll Tax Holiday Jeopardizes Social Security's Future
In early August, President Trump signed an executive order that would give millions of workers a small pay increase through the end of the year. The increase would be approximately $62 for the average worker earning a little more than $1,000 a week. Each worker could end up getting more than one week’s worth of pay by New Year’s Eve.
The paycheck increase is made possible by temporarily deferring an employee’s Social Security taxes. If Congress doesn’t permanently defer these payroll taxes, however, then each worker would have to pay the money back. The deferral began on September 1, but the Treasury Department’s guidance does not mandate participation.
The uncertainties around this program are adding up, but even worse is that a temporary or permanent deferral of Social Security taxes puts the program in greater jeopardy. Seniors are planning their retirements, counting on Social Security, but Congress has no idea where it will get the money to fund more than $40 trillion of promised benefits. Deferring payroll taxes means less money is going into the program, which will bring even more uncertainty surrounding how promised benefits will be paid.
We should also be concerned about the out of control national debt as Congress borrows our way out of the current crisis. Since the beginning of the year, the reported debt has increased by a whopping $3.4 trillion, or $31,000 per American taxpayer.
But the out of control unfunded Social Security and Medicare is even more worrisome. From 2019 to 2020 the money available to pay promised benefits over the next 75 years has grossly deteriorated by $7.5 trillion for Social Security and $2.2 trillion for Medicare.
Part of the reason for the out-of-control increases in Social Security and Medicare liabilities can be attributed to the old accounting adage, “if you don’t measure, you can’t manage it.” Social Security and Medicare liabilities are not reported on the U.S. Government’s balance sheet and increases in these liabilities are not included in deficit calculations. Therefore, the reported debt of more than $26.5 trillion is, unfortunately, not the true debt because these liabilities are not included. Truth in Accounting’s calculation of the true debt amount now stands at more than $134 trillion, when all liabilities are taken into account.
The eight percent increase in unfunded Medicare benefits is a little less than the historical average. But the 17 percent increase in Social Security, which is significantly higher than that program’s eight percent average increase, is a result of increases in estimated benefits. If promised benefits are not curtailed in the future, this money will have to come from somewhere. Congress could borrow the money necessary to pay promised Social Security and Medicare benefits, but can future bond markets sustain the more than $100 trillion needed? The Federal Reserve could print money to pay benefits, but that could result in runaway inflation.
Unlike with the rest of the budget, Congress doesn’t annually manage benefits set to be paid. The Social Security and Medicare programs are on automatic pilot. The calculation of unfunded benefits are based upon many uncontrollable and difficult to predict assumptions.
For example, in 2019, Social Security actuaries changed their assumptions on when and how many children will be born. They also updated data regarding lawful permanent residents. These changed demographic assumptions resulted in a $1.8 trillion increase in projected benefits. Economic assumptions were also updated to include price inflation and interest rates. These changed assumptions increased unfunded Social Security benefits by $2.5 trillion.
Now we are in unprecedented times. The actuaries’ assumptions may be affected by lower employment and other demographic and economic issues related to COVID-19. While we cannot predict what 2020 will bring, we do know that Social Security and Medicare are on unsustainable paths. Congress needs long term financial management tools to manage what they can: They should make changes so the amount of benefits are affordable and can be controlled, not left to the unpredictable changes in demographics and the economy.