Social Security beneficiaries could be in for a big surprise if this proposal passes.
As the number of coronavirus cases continues to soar, it’s becoming clear the first wave of the pandemic is still with us. The number of new daily infections across the U.S. surged past 66,000 in July, more than double the roughly 30,000 new cases per day the country experienced back in April.
For millions of Americans, a second stimulus check is needed now more than ever. Approximately four in 10 U.S. adults say another stimulus payment is necessary just to pay the bills, according to a poll from Money and Morning Consult, and 68% of retirees say a check would be either necessary or at least helpful in covering basic living expenses.
Congress is still negotiating the next coronavirus stimulus bill, but there are several proposals for what should be included. And there’s one proposal, in particular, that could be dangerous for Social Security recipients.
Tax cuts could be on the way
President Trump has announced that he would like to see payroll taxes reduced as part of the next coronavirus stimulus package, going so far as to say he won’t pass any relief bill that doesn’t include payroll tax cuts.
The president first suggested a payroll tax holiday, which would suspend payroll taxes through the end of the year. However, he has also indicated that he’d like to make tax cuts permanent, eliminating both employee and employer payroll taxes altogether.
The theory behind the tax cuts is that it will reduce workers’ financial hardship because they’ll be able to keep more of their paychecks. Not only does this measure not help unemployed Americans, but it could also harm current and future retirees collecting Social Security benefits.
Payroll tax cuts could have a disastrous effect on retirees
If payroll taxes are cut — either temporarily or permanently — it could threaten the future of Social Security benefits.
The Social Security Administration (SSA) relies almost exclusively on payroll taxes to fund benefits. However, the SSA has been experiencing a cash shortage for years, and the money coming in from payroll taxes isn’t enough on its own to continue paying out benefits in full.
To cover the deficit, the SSA has been tapping its two trust funds. Those funds are expected to last until 2034, according to the SSA Board of Trustees’ latest estimates, and once that money is gone, payroll taxes alone will only be enough to cover around 76% of projected benefits — meaning benefits could be slashed by roughly 25%.
If taxes are cut temporarily, that’s less money the SSA has right now to pay out in benefits. That means it will need to take more than expected from its trust funds, and those funds could be depleted before 2034. In other words, Social Security beneficiaries could see their monthly checks reduced sooner than anticipated.
Permanent tax cuts would be even more dangerous, because not only would the trust funds run dry sooner, but there would also be less money to pay out in benefits once the funds are depleted. If nothing changes, benefits could be cut by nearly 25%. A reduction in taxes could mean benefits will need to be cut by more than 25%, and if payroll taxes are eliminated entirely, benefits could potentially disappear.
Preparing for Social Security’s uncertain future
It can be tough to prepare for the future when nobody knows what will happen. There’s a good chance Congress could solve Social Security’s cash problems before 2034, but there’s also a chance retirees could see their benefits evaporate in the relatively near future.
One of the best ways to prepare is to ensure you won’t be too dependent on Social Security in retirement. Save as much as you can in your retirement fund so you’ll have a healthy nest egg to rely on in case Social Security benefits are reduced in the future. It’s also a good idea to build a strong emergency fund as you head into your senior years. Unexpected expenses will inevitably pop up, and an emergency fund can help you avoid withdrawing more than you should from your retirement account.
Finally, you may want to consider delaying claiming Social Security benefits. The longer you wait to claim (up to age 70), the more you’ll receive per month. If benefits are reduced down the road, starting out with bigger checks can make those cuts a little less painful.
Social Security is already on shaky ground, and payroll tax cuts would only exacerbate its current problems. While hopefully the SSA won’t have to resort to benefit cuts, it’s wise to be prepared for anything just in case.
Author: Katie Brockman