As the number of coronavirus cases continues to rise, it becomes clear that the first wave of the pandemic is still with us. The number of new daily infections in the US increased more than 66,000 in July, more than double the approximately 30,000 new cases per day that the country experienced in April.
For millions of Americans, a second stimulus control is needed now more than ever. About four in 10 American adults say another stimulus payment is needed just to pay the bills, according to a Money and Morning Consult survey, and 68% of retirees say a check would be necessary or at least useful to cover the basic subsistence costs.
Congress is still negotiating the next coronavirus stimulus bill, but there are several proposals for what should be included. And there is a proposal, in particular, that could be dangerous for Social Security beneficiaries.
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Tax cuts could be on the way
President Trump has announced that he would like to see payroll taxes cut as part of the next coronavirus stimulus package, going as far as saying that he will not pass any relief bill that does not include payroll tax cuts.
The president first suggested a payroll tax exemption, which would suspend payroll taxes until the end of the year. However, he also indicated that he would like the tax cuts to be permanent, completely eliminating payroll taxes for employees and employers.
The theory behind the tax cuts is that it will reduce workers’ financial difficulties because they will be able to keep more of their paychecks. This measure not only does not help unemployed Americans, but could also harm current and future retirees who collect 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 finance benefits. However, SSA has experienced a cash shortage for years, and the money from payroll taxes is not enough on its own to continue paying benefits in full.
To cover the deficit, SSA has been taking advantage of its two trust funds. Those funds are expected to last until 2034, according to the latest estimates from the SSA Board of Trustees, and once that money runs out, payroll taxes will only be enough to cover about 76% of projected benefits, which means that benefits could be cut approximately 25%.
If taxes are temporarily reduced, that’s less money SSA now has to pay benefits. That means you will have to take more than expected of your trust funds, and those funds could be depleted before 2034. In other words, Social Security beneficiaries may see their monthly checks reduced sooner than anticipated.
Permanent tax cuts would be even more dangerous, because not only would the trust funds run out sooner, but there would also be less money to pay benefits once the funds run out. If nothing changes, the benefits could be reduced by almost 25%. A reduction in taxes could mean that benefits will need to be cut by more than 25%, and if payroll taxes are removed entirely, the benefits could disappear.
Preparing for the uncertain future of Social Security
It can be difficult to prepare for the future when no one knows what will happen. There is a good chance that Congress can solve Social Security’s cash problems before 2034, but there is also a chance that retirees will see their benefits evaporate in the relatively near future.
One of the best ways to prepare is to make sure you won’t be overly reliant on Social Security during retirement. Save as much as you can in your retirement fund to have a healthy nest to trust in case Social Security benefits are reduced in the future. It is also a good idea to create a solid emergency fund as you go through your years. Unexpected expenses will inevitably appear, and an emergency fund can help you avoid withdrawing more than you should from your retirement account.
Finally, you may consider delaying your application for Social Security benefits. The longer you wait to claim (up to age 70), the more you will receive per month. If benefits are reduced in the future, starting with larger controls 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 it is to be hoped that SSA will not have to resort to benefit cuts, it is wise to be prepared for anything just in case.
