By Richard Rubin 

WASHINGTON -- President Trump ordered the Treasury Department to allow the deferment of most workers' Social Security payroll-tax payments for the final four months of the year. What does that mean for the Social Security program?

The Social Security portion of the payroll tax is 12.4% on wages and self-employment income up to $137,700 this year, split between employers and employees, and it's the largest source of funding for Social Security benefits.

Here's a quick look at the plan's implications for Social Security:

Does the president's payroll-tax deferment hurt Social Security?

Directly, not very much. The president lacks authority to reduce payroll taxes without Congress, so all he's doing is allowing the deferment of payments. When that happens, the Internal Revenue Service ultimately won't be able to collect the money from some people, including some who have left the jobs they hold now. That will leave a shortfall. The Committee for a Responsible Federal Budget estimates that missing amount at $5 billion. That's a few days worth of Social Security benefits.

OK. But what if Congress actually cuts the taxes?

Mr. Trump wants Congress to forgive any deferred taxes and says he'll push for that if re-elected. Depending on how many employers stop withholding payroll taxes and how Congress writes any forgiveness, this would create a much larger budget hole, perhaps around $100 billion.

Even then, the effect on Social Security benefits is likely to be minimal. Congress is likely to do exactly what it did in 2011 during a prior payroll-tax cut. It transferred money from general government revenue to the Social Security Trust Fund to cover the missing taxes. Mr. Trump said he would want Congress to do that again.

But didn't Trump say something about making permanent cuts to Social Security taxes?

Yes, but his statements were confusing.

On Saturday, when announcing the deferment, he said, "I plan to forgive these taxes and make permanent cuts to the payroll tax. So I'm going to make them all permanent."

The following day, his top economic adviser, Larry Kudlow, said on CNN that the president didn't mean that he wanted to eliminate the Social Security payroll tax permanently. Instead, the aim is just to forgive any taxes deferred this year.

Then later Sunday, Mr. Trump said "it may be permanent."

Democrats and Social Security advocates have seized on the president's remarks and the payroll-tax deferment to warn about the effects of Mr. Trump's proposals and the potential for future benefit cuts.

"President Trump is brazenly circumventing Congress to institute tax policy that destabilizes Social Security," said Rep. Richard Neal (D., Mass.), chairman of the House Ways and Means Committee.

Republicans have been particularly wary of making detailed Social Security proposals since President George W. Bush's failed push for partial privatization. President Trump promised in 2016 to protect the program. Many Democrats want to raise Social Security taxes on high earners and increase benefits.

So there's no reason to worry about Social Security?

Not necessarily. The payroll-tax mechanism is an essential part of the program. As a share of what they earn, lower-income workers pay more money into the program than upper-income workers do because the tax stops at $137,700 of wages. But the benefits are tilted toward lower-income workers.

The structure of the Social Security program helps make it popular because it operates more like an earned benefit and less like a welfare program.

Of course, workers' taxes aren't saved to fund their own retirements; today's taxes pay for today's benefits. But the wages that are used to determine the tax are also used to set benefit amounts, connecting what people pay in with what they get out.

"I know I pay it," said Jason Fichtner, who teaches at Johns Hopkins University's School of Advanced International Studies. "There's a link to the benefits I'm getting. That puts constraints on the program, healthy constraints."

Breaking those links by changing the payroll tax and using more general-fund money could affect the long-term political support for the program.

In a statement, AARP, the advocacy group for older Americans, said it was concerned with the administration's approach and said that it "exacerbates people's already-heightened fears and concerns about their financial and retirement security."

What is the current state of Social Security?

In the short run, it's fine. In the long run, not so much. The aging U.S. population means that there are fewer workers to support each retiree and the Social Security program will soon start spending more money than it takes in each year, relying on funding from years when it had a surplus.

According to estimates calculated before the pandemic, the Social Security retirement-benefits trust fund will run out of money in 2034. At that point, if Congress does nothing, only partial benefits would be paid, using the money that's still coming in. To prevent that outcome, Congress could raise taxes, reduce benefits a different way or make other changes to the program.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

August 12, 2020 10:44 ET (14:44 GMT)

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