The likelihood that people will file for benefits sooner amid a
downturn and the possible decline in payroll tax revenue could put pressure on
the Social Security trust fund
March 25, 2020 By Mary Beth Franklin
During
recessions, people tend to claim Social Security retirement or disability
benefits sooner than they would otherwise because they can’t afford to delay.
In addition, high unemployment caused by the economic fallout from the
worldwide coronavirus pandemic would reduce the payroll tax revenue that funds
Social Security.
Coupled
with President Donald Trump’s proposed tax holiday to temporarily eliminate
payroll taxes for employers and employees, a spike in early Social Security claims and a reduction
in payroll tax collections could seriously weaken the long-term financial
outlook for the Social Security trust fund, a seniors’ advocacy group warned
Tuesday.
“Although
many older adults today are putting off claiming benefits to allow
their Social Security payouts to grow, they are unlikely to be able to afford
to wait if they lose their jobs or when the value of their retirement account
investments are significantly impacted,” said Mary Johnson, a Social Security
and Medicare policy analyst for The Senior Citizen League.
During
the Great Recession, which lasted from December 2007 to June 2009, unemployment
peaked in October 2009 and remained high through at least the first half of
2013. The share of eligible men who started collecting their Social Security
retirement benefits early increased in 2009 as the unemployment rate for older
men surged, according to a 2013 report published by the Urban Institute
entitled “How
Did the Great Recession Affect Social Security Claiming?”
However,
the growth in early claiming trends was modest and didn’t last, the report
noted. Early claims for retirement benefits fell in 2010 and 2011 as men again
delayed retirement, resuming a steady decline in men’s early claiming patterns.
That trend began in 2000 in response to changes in Social Security rules that
eliminated earnings restrictions for individuals once they reached full
retirement age. Prior to 2000, earnings restrictions applied up to age 70.
“Providing
a complete payroll tax break to stimulate the economy would only exacerbate
financing issues and would be unlikely to make a big enough emergency impact
when needed, especially for people who aren’t working,” Johnson said. “Congress
needs to ensure that any big emergency financial stimulus to address a
coronavirus-caused economic recession doesn’t put Social Security and Medicare
benefits at risk as well.”
Trump
has proposed eliminating payroll taxes that fund Social Security and Medicare
beginning through the end of the year. The Institute on Taxation and Economic
Policy, a nonpartisan think tank, estimates the proposed payroll tax holiday
would cost $843 billion and 65% of its benefits would go to the richest 20% of
taxpayers.
In 2020,
employers and employees each pay 7.65% of the first $137,700 of wages to fund
Social Security and Medicare. Self-employed individuals pay both the employer
and employee portion, for a combined tax rate of 15.3%.
The
Social Security portion is 6.20% on earnings up to the applicable taxable
maximum amount. The Medicare portion is 1.45% on all earnings, even those
above the maximum wage base.
Employees
would benefit directly from eliminating their share of the Social Security and
Medicare taxes, the ITEP analysis said, but the benefits would not do a good
job of targeting those who need help the most. Eliminating the employer side of
these taxes would provide a windfall to corporations and other businesses, the
report added.
Congress
is working on an economic stimulus package that includes a compromise plan to
target payroll tax relief to small businesses.
In the
meantime, an InvestmentNews reader asked a timely question
about what would happen if a client, who works part-time and collects Social
Security, files for unemployment benefits. “Does unemployment income count
against the Social Security earnings test?” he asked.
The
short answer is no.
In 2020, individuals
who claim Social Security before their full retirement age and continue to work
would lose $1 in benefits for every $2 earned over $18,240. Individuals who
turn 66 this year can earn up to $48,600 in the months before their birthday
and would only forfeit $1 in benefits for every $3 they earned over that limit.
The earnings restrictions disappear at full retirement age, meaning people can
earn any amount of income without jeopardizing any benefits.
“If a
client made $16,000 this year to date and then files for unemployment and
receives, hypothetically, $4,000 in benefits, does that $4,000 in
unemployment income push him over the Social Security wage limit and subject
him to repaying some of his Social Security?” the adviser asked via email.
No.
Social Security only counts “earned” income, which is defined as wages if you
work for someone else or net earnings if you are self-employed. It does not
count other government benefits — including unemployment benefits — investment
earnings, interest, pensions, annuities or capital gains.
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