Does Trump Want to KILL Social Security (PAYROLL TAX)

This is my stimulus update for Sunday, August 9.

I’m going to talk a little bit more about Trump’s memorandum on unemployment and then we’re going to talk about his memorandum on payroll tax, the specifics of that, as well as potential effects on Social Security.

Trump’s Unemployment Memorandum Recap

Big stimulus news as I told you yesterday is that yesterday Trump signed into law four executive orders that effect or attempt to effect various, in my opinion, watered-down stimulus measures, one for payroll tax deferral, one for unemployment, one for eviction moratorium, and one for student loans.

This morning on CNN, Pelosi called them “absurdly unconstitutional.”

I’m not an attorney and can’t speak to the constitutionality of these executive orders, but I am pretty good with numbers, and I can tell you, as I’ve said, that these are watered-down versions of what should have been successfully negotiated over the past two weeks between Democrats and Republicans.

Now with the unemployment, I talked about who’s eligible, how long I think this would last, and all that,

Spoiler alert: it’s not $1,600/month.

I’ve seen some people call this $1,600/month, no way, it’s not lasting that long to be a monthly benefit.

I think that this order like the others from Trump will have its challenges. For example, in order for this to happen in a given state, that state will obviously have to be on board with this and be willing to kick in the $100 a week on top of the fed kick-in of $300 a week.  If a state isn’t on board with this, no go.

And this federal kick-in, the money’s just not there for it to last very long, after the federal kick-in money in the Disaster Relief Fund runs out, the memorandum just says, “States, look for extra money to keep paying people more.”

And this morning, Treasury Secretary Steven Mnuchin said, “We’ve been told they — meaning the states — can get this up and running immediately.”  That said, the cynic in me would tell you to not expect the extra $400 to pop up this week, your state may have issues with this, maybe some states are on-board with this and they can get this rolling out ASAP, but that may not be the case for all states. Some states may not even be on board with this.

When is the Payroll Tax Deferral Effective?

I want to talk about the presidential memorandum for payroll tax deferral.

Per the memorandum it says this payroll tax deferral would be effective from September 1 through December 31.  In the press conference yesterday Trump made it sound like it would be August, and the day before he made it sound like it would be retroactive to July, but the actual text of the memorandum says this would be effective beginning September 1.

How Much Is the Payroll Tax Deferral?

Now, first surprise about this one. It only applies to the 6.2% Social Security tax, not the 1.45% Medicare tax.  In the memorandum it says, “The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020.”

You look at the tax code, Internal Revenue Code section 3101(a), that’s just the Social Security piece.  There is no mention of 3101(b), that’s the Medicare piece in this memorandum.

That’s a surprise because you hear payroll tax, you think the whole kit and caboodle. But it doesn’t sound as good to say Social Security Tax deferral, does it, Mr. President?

Payroll Tax Deferral Example

Because look I think most people were thinking, OK, well if I make $50,000 times the full employee payroll tax percentage of 7.65%, Social Security and Medicare, that’s $3,825 of these taxes per year, let’s say you’re paid biweekly, divide by 26, and that’s an extra $147 in your paycheck every couple weeks from September 1 through the end of the year.

But the way this is actually written, you’d take the $50,000 times only 6.2%, the Social Security piece, which is $3,100, and if you’re paid biweekly, divided by 26, and that’s an extra $119 in your paycheck every couple weeks assuming you’re paid every couple weeks.  So what’s the total savings per this, let’s assume two pay periods a month, $119 more take-home per pay period, that’s $952 in increased take-home pay from September through the end of the year.

My Issue With This as a Business Owner

My thing is this.  So let’s say as a business owner in September, per this executive order, I stop withholding payroll taxes from my employees’ paychecks, let’s just use the example of the $50,000 a year employee.  So let’s say from September through December I don’t withhold $952 of their Social Security taxes. And then let’s say they quit.

Am I now left holding the bag to pay these $952 on my own, even though they’re technically the employee’s obligation because Trump doesn’t have the power to forgive these payroll taxes, only to defer collection of them.  What if I tried to remit them now, would the IRS actually block me from doing so based on this executive order?

These are all the questions I’m asking as not only a CPA but also a business owner with employees.

Trump Wants a Permanent Payroll Tax Cut

Trump of course has the answer.

He said in his press conference yesterday that if he is elected on November he plans to forgive these taxes and make permanent cuts to the payroll tax, making them all permanent tax cuts.

Donald Trump: If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax. I’m going to make them more permanent. Now, Joe Biden and the democrats may not want that, they don’t want that because they’re adding $3 trillion in taxes. They’ll have the option of raising everybody’s taxes and taking this away. But if I win I may extend and terminate. In other words, I’ll extend it beyond the end of the year and terminate the tax. And so, we’ll see what happens. Biden probably won’t be doing that; you’ll have to ask him. I don’t think he knows what he’s doing.

So you’re saying that you want the Social Security trust funds to have even less money in them because that’s what a permanent cut to the payroll tax would do because the payroll tax you’re suspending with this memorandum funds the Federal Old-Age and Survivors Insurance Trust Fund and Federal Disability Insurance Trust Fund (i.e. the Social Security Trust Funds), this would hurt Social Security.

Moreover, Trump, you can’t just do this on your own.  This would have to be a bill originating in Congress, passed by both houses, and signed by the president.

And it says it right there in Section 4 of this memorandum, Tax Forgiveness, it says, “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

You think you’re gonna get both houses with you on this, a lot of Congress members’ constituents will skin them alive for hurting Social Security and rightly so.

Mnuchin on How It Supposedly Won’t Hurt Social Security

But guess what Mnuchin said this morning on Fox about this?

This morning on Fox, Mnuchin said Trump doesn’t want to hurt Social Security with the permanent payroll tax suspension he said he’d look into enacting if re-elected.  Mnuchin said there would be an “automatic contribution from the general fund” with “no reduction of benefits.”

That’s right, apparently the suggestion here is to fund Social Security from general tax revenues not a specific payroll tax.

Ever since its inception, the promise of Social Security was that it would be self-supporting not subsidized by the federal government’s general fund.

President Franklin Roosevelt, who signed into law the Social Security Act, said, “If I have anything to say about it, it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury.”

This plan, that Mnuchin so innocently stated this morning on Fox, would turn the whole game on its head and create all kinds of problems.  Mnuchin says “automatic contribution from the general fund,” so does Congress get to play with that “automatic contribution” every year in their budget talks?

You say, Mnuchin, “no reduction of benefits” but come on, you’re now taking a system that was originally intended to be self-sustaining and self-supporting with people contributing into it throughout their working years, those contributions being invested into U.S. Treasury securities, and those amounts paid out to individuals after their working years are done, you’re taking this system, which has run for 85 years in this way, and now letting probably Congress have fun with it.

Trump said earlier this year, “I’m not going to cut Social Security like every other Republican.”

I don’t know, Donald. This looks pretty fishy to me.

Who’s Eligible for the Payroll Tax Deferral?

In his speech Trump said it’s for employees who make less than $100,000 per year but in the actual text of the memorandum it says, “The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.”

So there’s nothing in here about $100,000 per year.  All this says is if your pre-tax paycheck every two weeks is less than $4,000, this payroll tax deferral applies to you.

Potential Inequalities

Let’s say that I have two jobs.  I make $5,000 every two weeks at one and $1,000 every two weeks at the other.  My annual income exceeds $150,000 a year.  So how this reads to me is that I would still get this payroll tax deferral on the $1,000 every two week job even though I’m a relatively high income earner,

Then someone who makes less money than me, but even though they make a little bit over $4,000 every two weeks, they wouldn’t.

There’s some inefficiency here where a potentially high income earner  could get this payroll tax deferral, but lower income earner might not. This isn’t based on your tax return, unlike the stimulus checks which are based on your tax return. This is just just based on your pay stub.

You see why this is inefficient? Why a stimulus check would be way better, not only does it not have the complexities and potential inequalities of this payroll tax deferral, but it puts money in people’s pockets now, not stretched out a few bucks every pay period between September and December.

Stimulus Check Would Be Way Better

Obviously stimulus check benefits those who are out of the workforce. Could you think of the things that President Trump signed yesterday?

What about people who are detached from the labor force, they’re not on unemployment, and they’re not working?

Payroll tax deferral, that really only benefits those who are working right now. The unemployment obviously would benefit the unemployed.

What about the people who are not in the labor force, retirees, other people on some kind of fixed income? This doesn’t really help them.