Social Security is one of the most popular government programs of all time, and it's one that enjoys broad support among large swathes of the American public.
Not only do people like Social Security, but most are willing to pay for it. President Trump, however, wants to make a big change to the funding mechanism of the program. His position puts him at odds with most Americans. In fact, one recent survey shows that while the president wants to cut the taxes that currently pay for Social Security, there's instead majority support for expanding them.
Trump wants to cut the payroll tax, which most Americans want to apply more broadly
Social Security benefits are currently funded by a payroll tax which, as the name suggests, is a tax on people's paychecks. Specifically, workers pay 6.2% in taxes on income they earn from work in order to fund Social Security, while employers pick up an additional 6.2%. Self-employed individuals pay both their own portion and the employer's portion of the tax. And payroll taxes are also collected to fund Medicare.
Under the current system, workers pay payroll taxes on income up to a wage-base limit, which is a specific income threshold that can change annually. For 2020, the tax is collected on income up to $137,700. A recent survey, however, suggests that Americans would broadly support the assessment of payroll taxes on more income. In fact, the study conducted by the Senior Citizens League revealed that 72% of people think the payroll tax should be collected on all earnings. While the Americans responding to this study likely skew older than the general population, this is a fairly definitive outcome suggesting that most people believe payroll taxes should be expanded.
President Trump, however, not only doesn't want to expand payroll taxes to charge them on more income, but he wants to cut the taxes that workers currently pay. The President has signed an executive order allowing the collection of payroll taxes to be deferred through the end of the year as a form of coronavirus stimulus and has pledged he'll try to get the unpaid taxes forgiven if reelected. The President has also discussed permanently ending the collection of payroll taxes if Americans vote for him to serve a second term.
A permanent end to payroll tax collection would mean Social Security no longer has a dedicated funding source. Currently, the taxes collected must go into a special Social Security trust fund, which is invested in order to earn interest that can be used to help pay future benefits. If no further payroll taxes are collected, the program would only receive interest income from the current trust fund as well as tax revenue from benefits on high earners -- which is not nearly enough and which would leave the entitlement program broke within as little as two and a half years.
The President has suggested he would switch Social Security's funding mechanism to the general fund so it would receive money to operate just as other government benefit programs do. However, this would make it far more vulnerable to political whims, as lawmakers would need to allocate money for it each year in its budget. Benefit cuts would be much more likely to occur, as Social Security would no longer be seen as an earned benefit where workers pay into the program in exchange for getting a portion of their wages replaced in retirement.
The Senior Citizens League data suggesting Americans want payroll taxes charged on more income, rather than on less, strongly suggests this plan is not popular and is clearly at odds with what most people would prefer to see happen to Social Security. It remains to be seen if the President will be reelected and try to make the plan a reality, but chances are good he'll be met with substantial resistance if he goes forward with it.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The business news you need
With a weekly newsletter looking back at local history.