Trump’s Tax Plan Could Affect Your Social Security
Policy + Politics

Trump’s Tax Plan Could Affect Your Social Security

© Hyungwon Kang / Reuters

The Trump administration, at work on a new plan for tax reform, is reportedly considering a plan to cross into one of the most dangerous territories in American politics: fiddling with the Social Security system. According to multiple reports, the administration is entertaining the possibility of eliminating the 12.4 percent payroll tax, which would require it to find a new dedicated funding source for the retirement checks that millions of Americans count on in their old age.

The plan, first reported by the Associated Press, would be part of a major overhaul of the tax code that would make the US system look much more like that of many European nations, which long ago adopted a Value Added Tax model. A VAT is a form of consumption tax that falls on consumers rather than producers.

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The VAT model under consideration would generate significantly more revenue than the current corporate tax, allowing the elimination of the payroll taxes that fund Social Security and, all other things equal, giving workers a considerable boost in their take-home pay. (The 12.4 percent payroll tax is split evenly, with 6.2 percent paid by the employer and 6.2 percent paid out of the worker’s gross wages.)

But as former president George W. Bush learned, people start getting nervous when politicians in Washington mess with Social Security.

For better or worse, the system was set up by design to be funded by a dedicated tax that appeared on every worker’s pay stub throughout their working lives. One thing that did was create a sense of ownership of the benefit -- a sense of “entitlement,” though not in the pejorative sense of the word as it is commonly used today.

Social Security is an entitlement not because people feel they are due to something that they didn’t earn, but because they believe, rightly, that they have paid for it directly from their wages throughout their working lives.

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If the payroll tax is eliminated, and the system is funded by Congressional appropriations, the link between work and the Social Security check that one receives in retirement will be weakened, and that could have real ramifications for future debates about the program.

There are multiple reasons why it is easier for Congress to propose cuts in Medicaid, the Supplemental Nutrition Assistance Program, or other social safety net entitlement programs than it is to talk about cutting Social Security benefits. One of them is that many people view the recipients of social safety net spending as undeserving of a government handout, while Social Security recipients are merely collecting what they are owed.

(The fact is that most Americans who live long enough to collect Social Security will actually get far more back from the system than they paid into it. So, while they may not be getting something they don’t deserve, they’re definitely getting more than they deserve.)

The Trump team’s tax plans are in the formative stages at this point, and the suggestion that Congress should get under the hood of Social Security and change out the funding mechanism may be nothing more than an attempt to see how receptive, or not, the public is to the idea of Trump and Congressional Republicans tinkering with the program.

Eventually, though, some president and some Congress are going to have to find a way to change the Social Security system to ensure long-term solvency. The reaction to this proposal could provide some indication of whether that’s a possibility during the Trump presidency.