Terminating Payroll Tax Could Wipe Out Social Security by 2023

Terminating Payroll Tax Could Wipe Out Social Security by 2023

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Plus, US debt is now larger than the economy
Tuesday, August 25, 2020

Terminating Payroll Tax Could End Social Security Benefits by 2023, Chief Actuary Says

Eliminating payroll taxes could drain the Social Security trust funds within a few years if no alternative source of funding is provided, the Social Security Administration’s chief actuary said in a letter released Monday.

Sens. Bernie Sanders (I-VT), Chuck Schumer (D-NY), Ron Wyden (D-OR), and Chris Van Hollen (D-MD) requested the analysis after Trump earlier this month signed a memorandum allowing payroll taxes to be deferred from September through the end of the year. The president also said he would "terminate" payroll taxes if he wins reelection.

"We will be, on the assumption I win, we are going to be terminating the payroll tax after the beginning of the new year," Trump told reporters earlier this month, adding that he would pay into Social Security through the Treasury Department’s general fund.

White House Press Secretary Kayleigh McEnany said the following day that Trump was just referring to having deferred payroll taxes forgiven. "The president is very clear on this matter that he wants a permanent forgiveness of the deferral. That’s as far as he’s gone, and he’s gone even further to say he’s going to make sure that Social Security is fully funded."

Trump would not be able to eliminate payroll taxes or transfer money from the general fund without legislative action by Congress, and lawmakers in both parties have pushed back against the idea.

Stephen C. Goss, the Social Security Administration’s chief actuary, noted in his letter to the senators that he was not aware of anyone proposing the hypothetical legislation they requested be analyzed. But he wrote that if no alternative revenue source was provided, Social Security’s disability insurance trust fund would be depleted by the middle of next year and its retirement trust fund would be exhausted by the middle of 2023. The programs would stop paying out benefits once those reserves are depleted.

If general fund transfers were used to make the Social Security trust funds whole, the programs’ benefits and financial condition "would be essentially unaffected," Goss wrote — though, again, absent some other source of revenue, such transfers would raise the federal budget deficit and Trump’s proposal would represent a massive change to the structure of a popular safety net program. A plan to draw money from the general fund is unlikely to pass a divided Congress.

Why it matters:
As the senators surely expected, the analysis will give Joe Biden and Democrats another cudgel to use against Trump.

"President Trump continues to play fast and loose with the health and well-being of America’s seniors," House Speaker Nancy Pelosi said in a statement. "The new analysis today shows the swift potential devastation of President Trump’s reckless call to ‘terminate’ the payroll tax: shattering the sacred promise of Social Security."

And Schumer warned: "
President Trump’s plan to eliminate Social Security’s dedicated funding would endanger seniors' Social Security and could mean the end of Social Security as we know it by 2023."

The Trump campaign insists that the president will protect Social Security benefits (though his budget proposals have included cuts to disability insurance). "Joe Biden’s allies are dusting off the old Social Security scare tactic playbook and talking about hypothetical legislation that does not exist," said Trump campaign communications director Tim Murtaugh, according to The Hill.

The bottom line:
The chances that payroll taxes are permanently eliminated appear slim at best, at least right now. And Trump’s payroll tax deferral is not expected to have much effect either, as employers are still awaiting guidance from the Treasury Department as to how the deferred taxes would be handled once they come due next year. Given the questions surrounding the deferral, most businesses are not expected to stop withholding payroll taxes.

US Debt Is Now Larger Than the Economy. Does It Matter?

The national debt is now roughly the size of the U.S. economy, crossing a threshold that has long worried deficit hawks and many economists.

At the end of 2019, the federal debt held by the public stood at $17 trillion, roughly 80% the size of the U.S. economy, and government projections showed it growing to 100% of the economy in about 10 years. But thanks to trillions of dollars of spending in response to the coronavirus recession this year, and the contraction of the economy itself, the debt now stands at 106% of gross domestic product — a 25% increase in a matter of months.

The concern has long been that a debt so large would inevitably ravage the economy by causing inflation to rise and interest rates to spike as investors demand higher returns from an increasingly shaky lender, the U.S. government.

Instead, despite the unprecedented run-up in the debt, interest rates sit near historic lows and inflation is muted in an economy struggling to recover from pandemic-driven losses.
Olivier Blanchard, the former chief economist for the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics in Washington, told The New York Times that few economists are concerned about crossing the long-feared line.
"At this stage, I think, nobody is very worried about debt," he said. "It’s clear that we can probably go where we are going, which is debt ratios above 100 percent in many countries. And that’s not the end of the world."

What changed?
Some experts say worries about the debt surpassing the size of the economy were misplaced, in part because of the role played by the Federal Reserve. Since March, the Fed has purchased more than $1.8 trillion worth of Treasury securities, providing the liquidity the Treasury needs to rapidly expand the debt, without any apparent negative consequences. "Fiscal constraints aren’t nearly what economists thought they were," Daniel Ivascyn, chief investment officer for PIMCO, told the Times. "When you have a central bank essentially funding these deficits, you can take debt levels to higher debt levels than people envisioned."

Critics in the Modern Monetary Theory school — which holds that inflation is the main constraint on government spending, not the size of the debt — say that the mainstream economic models that link increased government debt with rising interest rates are just plain inaccurate. "The whole premise that deficits drive up interest rates, it’s just wrong," Stephanie Kelton, a professor of economics at Stony Brook University and a leading MMT supporter, told the Times.

Still, some investors remain concerned about the possibility of a rapid rise in inflation driven by the tidal wave of debt-fueled spending, and that concern is showing up in soaring gold prices, among other things. And some economists warn that the growing debt will have to be addressed through higher taxes or reduced spending at some point in the future, even if the immediate effects seem benign.

The political implications:
Although many economists seem to have lost their fear of government debt, Republican efforts to limit the size of the next coronavirus bill are grounded in part in worries about adding another $2 trillion or $3 trillion to the national debt. But GOP lawmakers are finding little support among economists these days, including those on Wall Street. "What’s very clear is that the U.S. economy has some room," Rick Rieder, global chief investment officer of fixed income at BlackRock, told the Times. "I would argue that we still have room now for another fiscal package."

Number of the Day: $56.14

A June analysis by Goldman Sachs found that a national face-mask mandate could substitute for economic lockdowns that would otherwise cut GDP by 5%. A new analysis by The Economist builds on those calculations, suggesting that "an American wearing a mask for a day is helping prevent a fall in GDP of $56.14. Not bad for something that you can buy for about 50 cents apiece."

Poll of the Day: Economists Say Congress Needs to Do More on Virus Response

Nearly two-thirds of economists surveyed by the National Association for Business Economics say the U.S. is still in the recession that began in February and eight in 10 see at least a 25% chance of a double-dip recession.

The economists are split on whether Congress has delivered an adequate fiscal response to the coronavirus recession, with 40% saying lawmakers have not done enough, 37% saying the response has been sufficient and 11% saying it has been excessive.

A majority of economists in the survey say that the next fiscal relief package should provide at least $1.5 trillion, and 30% say it should provide $2 trillion or more.

A solid majority (60%) believes Congress should extend both the federal boost to unemployment insurance and the Paycheck Protection Program of forgivable loans to small businesses. Nearly nine in 10 economists (88%) say they are at least "somewhat" concerned with federal public debt being on track to surpass 100% of GDP.

Asked about the best ways for the government to raise revenues, 55% pointed to a broad-based energy or carbon tax, while just over half supported broadening of the individual and/or corporate tax bases.

By a 62%-to-25% margin, the economists also say the Joe Biden would be better for the economy than President Trump.

The survey of 235 NABE members was conducted from July 30 to August 10.

Quote of the Day: Beware the Double Dip

"With the US remaining in the grips of the pandemic, the case for sustainable recovery looks tenuous. While rebounds in production and employment underscore significant progress on the supply side of the economy, these gains are far from complete. Through July, nonfarm employment has recouped only 42% of what was lost in February and March, and the unemployment rate, at 10.2%, is still nearly triple the pre-COVID level of 3.5%."

Stephen S. Roach, former Chairman of Morgan Stanley Asia, warning in a piece at Project Syndicate about the possibility of a relapse for the U.S. economy. "The current recession is a classic set-up for a double dip," Roach says, while noting that the majority of recessions since 1945 have involved temporary rebounds followed by further declines.

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