Terminating Payroll Tax Could Wipe Out Social Security by 2023

By Yuval Rosenberg

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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