Tag Archives: policy

The US Has Hit Record High Fiscal and Trade Deficits

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A.  Introduction

The final figures to be issued before the election for the federal government fiscal accounts and for the US trade accounts have now been published.  The US Treasury published earlier today the Final Monthly Treasury Statement for the FY2020 fiscal year (fiscal years end September 30), and earlier this month the BEA and the Census Bureau issued their joint monthly report on US International Trade in Goods and Services, with trade data through August.  The chart above shows the resulting fiscal deficit figures (as a share of GDP) for all fiscal years since FY1948, while a chart for the trade deficit will be presented and discussed below.  The figures here update material that had been presented in a post from last month on Trump’s economic record.

The accounts show that the federal fiscal deficit as a share of GDP has reached a record level (other than during World War II), while the trade deficit in goods (in dollar amount, although not as a share of GDP) has also never been so high.  Trump campaigned in 2016 arguing that these deficits were too high, that he would bring them down sharply, and indeed would pay off the entire federal government debt (then at over $19 trillion) within eight years.  Paying off the debt in full in such a time frame was always nonsense.  But with the right policies he could have at least had them go in the directions he advocated.  However, they both have moved in the exact opposite direction.  Furthermore, this was not only a consequence of the economic collapse this year.  They were both already increasing before this year.  The economic collapse this year has simply accelerated those trends – especially so in the case of the fiscal deficit.

B.  The Record High Fiscal Deficit

The federal deficit hit 15.2% of GDP in FY2020 (using the recently issued September 2020 estimate by the CBO of what GDP will be in FY2020).  The highest it had been before (other than during World War II) was 9.8% of GDP in FY2009, in the final year of Bush / first year of Obama, due to the economic collapse in that final year of Bush.  In dollar terms, the deficit this fiscal year hit $3.1 trillion, which was not far below the entire amount collected in tax and other revenues of $3.4 trillion.

This deficit is incredibly high, which does not mean, however, that an increase this year was not warranted.  The US economy collapsed due to Covid-19, but with a downturn sharper than it otherwise would have been had the administration not mismanaged the disease so badly (i.e. had it not neglected testing and follow-up measures, plus had it encouraged the use of masks and social distancing rather than treat such measures as a political statement).  By neglecting such positive actions to limit the spread of Covid-19, the only alternative was to limit economic activity, whether by government policy or by personal decision (i.e. to avoid being exposed to this infectious disease by those unwilling to wear masks).

The sharp increase in government spending this year was therefore necessary.  The real mistake was the neglect by this administration of measures to reduce the fiscal deficit during the period when the economy was at full employment, as it has been since 2015.  Instead of the 2017 tax cut, prudent fiscal policy to manage the debt and to prepare the economy for the risk of a downturn at some point would have been to call for a tax increase under such conditions.  The tax cut, coupled also with an acceleration in government spending, led fiscal deficits to grow under Trump well before Covid-19 appeared.  Indeed, they grew to record high levels for periods of full employment (they have been higher during downturns).  As the old saying goes:  “The time to fix the roof is when the sun is shining.”  Trump received from Obama an economy where jobs and GDP had been growing steadily and unemployment was just 4.7%.  But instead of taking this opportunity to reduce the fiscal deficit and prepare for a possible downturn, the fiscal deficit was increased.

The result is that federal government debt (held by the public) has jumped to 102% of GDP (using the CBO estimate of GDP in FY2020):

The last time the public debt to GDP ratio had been so high was at the end of World War II.  But the public debt ratio will soon certainly surpass that due to momentum, as fiscal deficits cannot be cut to zero overnight.  The economy is weak, and fiscal deficits will be required for some time to restore the economy to health.

C.  The US Trade Deficit is Also Hitting Record Highs in Dollar Terms

In the 2016 campaign, Trump lambasted what he considered to be an excessively high US trade deficit (specifically the deficit in goods, as the US has a surplus in the trade in services), which he asserted was destroying the economy.  He asserted these were due to the various trade agreements reached over the years (by several different administrations).  He would counter this by raising tariffs, on specific goods or against specific countries, and through this force countries to renegotiate the trade deals to the advantage of the US.  Deficits would then, he asserted, rapidly fall.  They have not.  Rather, they have grown:

Trump has, indeed, launched a series of trade wars, unilaterally imposing high tariffs and threatening to make them even higher (proudly proclaiming himself “Tariff Man”).  And his administration has reached a series of trade agreements, including most prominently with South Korea, Canada, Mexico, Japan, the EU, and China.  But the trade deficit in goods reached $83.9 billion in August.  It has never been so high. The deficit in goods and services together is not quite yet at a record high level, although it too has grown during the Trump period in office.  In August that broader deficit hit $67.1 billion, a good deal higher than it ever was under Obama but still a bit less than the all-time record of a $68.3 billion deficit reached in 2006 during the Bush administration, at the height of the housing bubble.

The fundamental reason the deficits have grown despite the trade wars Trump has launched is that the size of the overall trade deficit is determined not by whatever tariffs are imposed on specific goods or on specific countries, nor even by what trade agreements have been reached, but rather by underlying macro factors.  As discussed in an earlier post on this blog, the balance in foreign trade will be equal to the difference between aggregate domestic savings and aggregate domestic investment.  Tariffs and trade agreements will not have a significant direct impact on those macro aggregates.  Rather, tariffs applied to certain goods or to certain countries, or trade agreements reached, may lead producers and consumers to switch from whom they might import items or to whom they might export, but not the overall balance.  Trade with China, for example, might be reduced by such trade wars (and indeed it was), but this then just led to shifts in imports away from China and towards such countries as Viet Nam, Cambodia, Bangladesh, and Mexico.  Unless aggregate savings in the US increases or aggregate investment falls, the overall trade deficit will remain where it was.

Tariffs and trade agreements can thus lead to switches in what is traded and with whom.  Tariffs are a tax, and are ultimately paid largely by American households.  Purchasers may choose either to pay the higher price due to the tariff, or switch to a less desirable similar product from someone else (which had been either more expensive, pre-tariff, or less desirable due to quality or some similar issue), but unless the overall savings / investment balance in the economy is changed, the overall trade deficit will remain as it was.  The only difference resulting from the trade wars is that American households will then need to pay either a higher price or buy a less desirable product.

It is understandable that Trump might not understand this.  He is not an economist, and his views on trade are fundamentally mercantilist, which economists had already moved beyond over 250 years ago.  But Trump’s economic advisors should have explained this to him.  They have either been unwilling, or unable, to do so.

Are the growing trade deficits nevertheless a concern, as Trump asserted in 2016 (when the deficits were lower)?  Actually, in themselves probably not.  In the second quarter of 2020 (the most recent period where we have actual GDP figures), the trade deficit in goods reached 4.5% of GDP.  While somewhat high (generally a level of 3 to 4% of GDP would be considered sustainable), the trade balance hit a substantially higher 6.4% of GDP in the last quarter of 2005 during the Bush administration.  The housing bubble was then in full swing, households were borrowing against their rising home prices with refinancings or home equity loans and spending the proceeds, and aggregate household savings was low.  With savings low and domestic investment moderate (not as high as a share of GDP as it had been in 2000, in the last year of Clinton, but close), the trade deficit was high.  And when that housing bubble burst, the economy plunged into the then largest economic downturn since the Great Depression (largest until this year).

Thus while the trade deficit is at a record level in dollar terms (the measure Trump refers to), it is at a still high but more moderate level as a share of GDP.  It is certainly not the priority right now.  Recovering from the record economic slump (where GDP collapsed at an annualized rate of 31% in the second quarter of 2020) is of far greater concern.  And while expectations are that GDP bounced back substantially (but only partially) in the third quarter (the initial estimate of GDP for the third quarter will be issued by the BEA on October 29, just before the election), the structural damage done to the economy from the mismanagement of the Covid-19 crisis will take substantial time to heal.  Numerous firms have gone bankrupt.  They and others who may survive but who have been under severe stress will not be paying back their creditors (banks and others), so financial sector balance sheets have also been severely weakened.  It will take some time before the economic structure will be able to return to normal, even if a full cure for Covid-19 magically appeared tomorrow.

D.  Conclusion

Trump promised he would set records.  He has.  But the records set are the opposite of what he promised.

Death Rates due to Covid-19: An International Comparison

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A.  Introduction

In an interview in early August, when over 1,000 Americans were dying each day due to Covid-19, President Trump was asked how he could consider the disease to be then under control.  He responded “They are dying, that’s true”, and then went on to say “it is what it is.  But that doesn’t mean we aren’t doing everything we can.  It’s under control as much as you can control it.”

If it were true that the disease was “under control as much as you can control it”, then deaths in the US would be similar (as a share of population) to what they are in other countries around the world.  It is the same disease everywhere.  And it would especially be true now, more than nine months into this pandemic.  While much was still not known in the early months on how best to bring this terrible disease under control, we now know what has worked in other countries plus we have results from numerous scientific studies.

In particular, it has become clear that a highly effective measure to contain the virus is also the simplest:  Everyone should just wear a mask when out in public.  The experience of East Asian countries, which will be examined below and where mask-wearing was common even before Covid-19, is consistent with this.  There are also now scientific studies backing this up, as discussed in an editorial published on July 14 in JAMA – the Journal of the American Medical Association.  Dr. Robert Redfield, the head of the CDC, was a co-author of that editiorial, and in interviews and press conferences since he has made clear that if everyone simply wore a mask when in public, the disease would be brought under control in as little as four to eight weeks.

Dr. Redfield said the same in testimony to Congress on September 16 (although with a more cautious time scale, allowing between 6 and 12 weeks for the pandemic to be brought under control).  Indeed, Dr. Redfield noted in that testimony that wearing of masks could be more effective than even a vaccine, as any vaccine that is developed will likely have an effectiveness of 70% or less.  A mask, if worn, can do better.

But getting most of the population to wear a mask requires political leadership, and that has been sorely lacking under President Trump.  Indeed, under Trump the wearing of masks has been turned into an issue of political identity, and he has even mocked Joe Biden and Democrats generally for wearing them.  Trump also asserted, on the same day as Dr. Redfield’s congressional testimony, that the doctor was wrong in his medical advice on masks.

The sad result is that death rates from Covid-19 in the US are now not simply higher than in many other countries around the world, but higher by a large multiple.  There is no basis for asserting that this disease is “under control as much as you can control it”.

We will examine here what other countries have been able to achieve in comparison to what the US has, basically through a series of charts.  A word on the data:  The figures were all calculated from the reported deaths by country from Covid-19 downloaded from the site maintained by the Center for Systems Science and Engineering at Johns Hopkins University.  The data were downloaded on the afternoon of September 15, with the country data current through September 14.

B.  US Compared to Canada and Europe

The chart at the top of this post shows the number of deaths from Covid-19 per day per million of population (based on a rolling seven-day average ending on the date shown), from January 29 through to September 14, in the US, Canada, and Western and Eastern Europe (with Eastern Europe covering the Baltics through to Albania).

Starting with the US, deaths rose rapidly in late March and early April, peaked in mid-April, and then fell.  This continued until early July.  But then, as a number of states rushed to re-open their economies in May and especially June (with the strong encouragement of Trump), death rates rose again, doubling from their not-so-low early-July lows.  They then came down modestly in August and the first half of September, but remain far higher than elsewhere.

The profiles in Europe and Canada are different in an important way.  While death rates rose early in Western Europe (and to rates higher than what came later for the US), when much was still not known about the virus and how it was spread, they were then brought down to very low rates – well below those of the US.  And they have remained low (at least so far).  This is in contrast to the US, where death rates rose in July as lessons on how to manage the virus were ignored.

Canada followed a similar profile to that of Western Europe, although with an initial peak that came later (and with a substantially lower peak – only half that of Western Europe), with then a decline to low levels that have remained low.  In Eastern Europe, early rates in the spring never rose that high, but then still came down by June.  Since then they have risen some, but to rates that remain well below those of the US (at less than a third of the US rate, as of mid-September).

Breaking this down for some of the major countries of Western Europe:

Rates peaked early and at high levels in Italy, France, and the UK, but then all came down and remained down.  The peak in Germany came at roughly the same time as that of the US (but at well less than half the US rate), and then came down to an extremely low level.  As of mid-September, the death rate in Germany is only 2% of the US rate.  If it’s “under control as much as you can control it” in the US, as Trump asserted, why is it that the death rate, per million of population, can be 98% less in Germany?

There are two special cases in Western Europe that are worth examining – Spain and Sweden:

Rates rose rapidly and to quite high levels in Spain early in the crisis.  Its hospital system was overwhelmed and many died.  But then Spain brought down the rates to very low levels by June and July.  They have, however, trended up since mid-August, as it appears Spain opened up its seasonal tourism industry too rapidly (tourism as a share of GDP is far higher in Spain than in any other OECD member country).  But even with the recent increase, the number of deaths per million in Spain remains less than half (45%) of what the rate is in the US as of mid-September.

(One might also note the negative numbers recorded for the number of deaths in Spain due to Covid-19 for a period in late May, as well as an odd spike up in late June.  The reason for this is that Spain revised its counts of the number who had died from Covid-19 as they later reviewed what had been submitted during the peak of the crisis.  A focus on the statistics was not the highest priority earlier – saving lives was.  It is of course impossible for there to be a negative number of deaths.  But figures are recorded each day for the cumulative number of deaths due to Covid-19, and when that total was revised down on May 25, the daily change in the total (which is the basis for the daily death count) will be negative (and will be negative for a week, as the numbers are seven-day averages).  And a later upward revision in late June will look like a spike up.)

Sweden is also an interesting case as, early in the crisis, it deliberately decided not to mandate closures of restaurants, offices, and other non-essential work locations, but rather left this to be decided by each entity.  But the policy failed:  Deaths from Covid-19 rose to rates well above US levels (and was especially far above the rates of its Nordic neighbors of Norway, Finland, and Denmark, although below the peak levels seen in Italy, Spain, France, and the UK).  The rates then fell relatively slowly in Sweden.  They eventually moved to policies more in line with the rest of Europe, and eventually saw similarly low rates.

D.  US Compared to East Asia, Australia, and New Zealand

As an earlier post on this blog on the number of Covid-19 cases discussed, the countries of East Asia, as well as Australia and New Zealand, show what is possible if serious measures are taken to control the spread of the virus (and possible in a region with more travel and business exposure to China than any other region).  The measures required are not exotic.  Nor did they require resources that others did not have.  All that was required were the standard public health measures used to control the spread of any infectious disease – extensive testing with follow-up tracing of contacts and quarantining of those exposed, plus the normal and widespread use of simple masks.  With such measures, Taiwan was able, for example, to keep open its schools basically throughout (in February it extended its regular Chinese New Year holiday by an extra two weeks, but has since followed its regular schedule).

The result was few cases of Covid-19, and few deaths:

 

The rates for all the countries listed on the chart were plotted.  But they were all so close to zero that, other than for the few names shown, one could not distinguish one from the other.

There was an increase in the rates since mid-July in Australia, and to a lesser extent in Hong Kong (and a far lesser extent in Japan), as some of the earlier controls were eased.  But these have all now been brought back under control.  And even with these outbreaks, the rates never approached the US rates.

E.  Who are the Comparables for the US?

Who, then, might have a record comparable to that of the US?  Among the larger countries:

Donald Trump can be proud to say that death rates in the US have, since June, been lower than the rates in Mexico and Brazil.  The US has not performed as poorly as they have.  The pattern in South Africa is somewhat odd in that its rates were higher than those of the US between mid-July and mid-August, but are now substantially less.  And Russia as well as India have had lower rates throughout.

All this assumes the tracking statistics on deaths from Covid-19 are accurate, and one might question this for some of these countries.  As was discussed above for the case of Spain, such numbers can be difficult to assemble even with resources that the countries here do not have.  But for the ranges in the numbers seen here, the conclusions would still hold even if the rates were substantially higher.  As of mid-September, the South African rate would have needed to have been twice as high, and the Indian and Russian rates three times as high, to reach the US rate.

Note that I have not included China.  If it were added, it would show extremely low death rates per million throughout, with a peak of just 0.1 in mid-February.  But while the deaths from Covid-19 may well have been low compared to others (particularly when expressed per million, given its population), I am not confident they were in fact that low.  Restrictions on the news media and what they can report do not engender confidence.

But overall, to find countries with records on management of Covid-19 comparable to what they have been in the US, one needs to look at countries with per capita incomes that are far below that of the US.  The US has thought of itself as belonging in the top rank of countries.  But for this, the only countries with comparable death rates from Covid-19 are countries that, before Trump, the US had not normally been grouped with.

F.  What Deaths in the US Would Have Been at the Rates Other Countries Have Been Able to Achieve

As noted at the top of this post, President Trump claimed that the disease is “under control as much as you can control it.”  But as we have seen, it is not.  Other countries, facing the same disease, have been able to manage it with far lower death rates than the US has had.  How much of a difference would this have made?

Little was known about the disease early in the crisis, and one can argue that countries were searching then for what best to do.  And after the high early peaks, the rates did come down in the US as well as in Europe and Canada.  But then the US reversed course while rates continued to fall elsewhere.  It is thus this more recent period that most clearly shows the consequences of the choices the US made compared to others.  For the purposes of this exercise, we will therefore look at the period since August 1.

From August 1 to September 14, a period of 45 days, US deaths totaled 40,459.  This is a bit over a fifth (21%) of the total US deaths as of September 14 of 194,493.  It is still a substantial figure:   The number of US soldiers who died in battle in the Korean War totaled 33,739, and the number who died in the Vietnam War totaled 47,434.  But based on the numbers of deaths per million in other countries and regions, how many would have died for a population equal to that of the US?:

If the US had had the number of deaths per million that Romania had over this same period, then 31,700 would have died, or about three-quarters of the number of Americans who died.  If the US had the rate of Albania, about 20,800 would have died, or about half the number of Americans who died.  One might ask that if “it is what it is”, and that “It’s under control as much as you can control it”, why is it that Romania could control it so that there would only be three-quarters as many deaths, and Albania could control it so that there would only be half as many deaths?  Neither Romania nor Albania has the resources the US has, plus they are small and open.

Other cases are more extreme.  If the US had the rate over this period of the EU as a whole, there would have been 5,465 deaths.  Instead, it was 7.4 times higher.  At the rate of Canada, there would have been 2,184 deaths.  Instead, it was 18.5 times higher.  And Singapore and Taiwan both had zero deaths over this period.  The most recent death (as of this writing) was on July 14 in Singapore and on May 11 in Taiwan.  If the US had their rates, there would have been no deaths.

There is of course a wide range here.  Plus things may change.  Infection rates have been rising in Europe in recent days, and increases in death rates may soon follow.  The US has also today (on September 22, as I write this) passed a significant milestone:  More than 200,000 have now died in the US from this disease.  And there are widespread concerns that rates will increase this fall and winter across the Northern Hemisphere in a “second wave”, as more people remain inside and as they become less vigilant as time goes on. One has seen this with prior infectious diseases, particularly those that spread through the air.  There is also increasing pressure to reopen schools for in-class teaching and to fully reopen businesses.

So there is uncertainty on how this will progress.  But based on what we know for the last month and a half, a question to address is why the Trump administration has not been able to do as good a job of reducing deaths from this virus as have the governments of Romania, Albania, Bulgaria, Russia, Spain, Australia, Croatia, Serbia, Luxembourg, Portugal, Poland, France, Greece, Hong Kong, Italy, Sweden, Czechia, Slovenia, the Netherlands, Belgium, the United Kingdom, Canada, Switzerland, Hungary, Austria, Ireland, Japan, Denmark, Lithuania, Germany, Norway, Slovakia, Latvia, Finland, South Korea, Estonia, New Zealand, Singapore, and Taiwan.

Trump’s Attack on Social Security

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Trump famously promised in his 2016 campaign for the presidency that he would never cut Social Security.  He just did.  How much is not yet clear.  It could be minor or it could be major, depending on how he follows up (or is allowed to follow up) on the executive order he signed on Saturday, August 8 while spending a weekend at his luxury golf course in New Jersey.  The executive order (one of four signed at that time) would defer collection of the 6.2% payroll tax paid by employees earning up to $104,000 a year for the pay periods between September 1 and December 31 (usefully straddling election day, as many immediately noted).

What would then happen on December 31?  That is not clear.  On signing the executive order, Trump said that “If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax.  I’m going to make them all permanent.”  He later added:  “In other words, I’ll extend beyond the end of the year and terminate the tax.”

The impact on Social Security and the trust fund that supports it will depend on how far this goes.  If Trump is re-elected and he then, as promised, defers beyond December 31 collection of the payroll tax that workers pay for their Social Security, the constitutional question arises of what authority he has to do this.  While temporary deferrals of collections are allowed during a time of crisis, what happens when the president says he will bar the IRS from collecting them ever?  The president swore in his oath of office that he would uphold the law, the law clearly calls for these taxes to be collected, and a permanent deferral would clearly violate that.  But would repeated “temporary” deferrals become a violation of the statutory obligations of a president?  And he has clearly already said that he wants to make the suspension permanent and to “terminate the tax”.

There is much, therefore, which is not yet clear.  But one can examine what the impact would be under several scenarios.  They are all adverse, undermining the system of retirement benefits that has served the country well since Franklin Roosevelt signed the program into law.

Some of the implications:

a)  Deferring the collection of the Social Security payroll taxes will lead to a huge balloon payment coming due on December 31:

The executive order that Trump signed directs that firms need not (and he wants that they should not) withhold from employee paychecks the 6.2% that goes to fund the employee share of the Social Security tax.  But under current law the taxes are still due, and would need to be paid in full by December 31.

Suppose firms did decide not to withhold the 6.2% tax, and instead allow take-home pay to rise by that amount over this four-month period straddling election day.  Unless deferred further, the total of what would have been withheld will now come due on December 31, in one large balloon payment.  For those on a two-week paycheck cycle, that balloon payment would have grown to 54% of their end of the year paycheck.  It is doubtful that many employees would be very happy to see that cut in end-year pay.  Plus how would firms collect on the taxes due on workers who had been with the firm but had left for any reason before December 31?  By tax law, the firms are still obliged to pay to the IRS the payroll taxes that were due when the workers were employed with them.

Hence most expect that firms will continue to withhold for the payroll taxes due, as they always have.  The firms would likely hold off on forwarding these payments to the IRS until December 31 and instead place the funds in an escrow account to earn a bit of interest, but they would still withhold the taxes due in each paycheck just as they always have (and as their payroll systems are set up to do).  This also then defeats the whole purpose of Trump’s re-election gambit.  Workers would not see a pre-election bump up in their take-home pay.

b)  But even in this limited impact scenario, there will still be a loss to the Social Security Trust Fund:

Thus there is good reason to believe that Trump’s executive order will likely be basically just ignored.  There would, however, still be a loss to the Social Security Trust Fund, although that loss would be relatively small.

Payroll taxes paid for Social Security go directly into the Social Security Trust Fund, where they immediately begin to earn interest (at the long-term US Treasury rate).  Based on what was paid in payroll taxes in FY2019 ($1,243 billion according to the Congressional Budget Office), and adjusting for the fewer jobs now due to the sharp downturn this year, the 6.2% component of payroll taxes due would generate approximately $40 billion in revenue each month.  Assuming the $160 billion total (over four months) were then all paid in one big balloon payment on December 31 rather than monthly, the Social Security Trust Fund would lose what it would have earned in interest on the amounts deferred.  At current (low) interest rates, the total loss to Social Security would come to approximately $250 million.  Not huge, but still a loss.

c)  If collection of the 6.2% payroll tax is deferred further, beyond December 31, the losses to the Social Security Trust Fund would then grow further, and exponentially, and become disastrous if terminated:

Trump promised that “if re-elected” he would defer collection by the IRS of the taxes due further, beyond December 31.  How much further was not said, but Trump did say he would want the tax to be “terminated” altogether.  This would of course be disastrous for Social Security.  Even if the employer share of the payroll tax for Social Security (an additional 6.2%) continued to be paid in (where what would happen to it is not clear), the loss to Social Security of the employee share would lead the Trust Fund to run out in less than six years.  At that point, under current law the amounts paid to Social Security beneficiaries (retirees and dependents) would be sharply scaled back, by 50% or more (assuming the employer share of 6.2% continued to be paid).

d)  Even if the Social Security Trust Fund were kept alive by Congress acting to replenish it from other sources of tax revenues, under current law individual benefits would be reduced on those who saw their payroll tax contributions diminished:

There is also an issue at the level of individual benefits, which I have not seen mentioned but which would be significant.  The extent of this impact would depend on the particular scenario assumed, but suppose that the payroll taxes that would have come due and collected from September 1 to December 31 were permanently suspended.  For each individual, this would affect how much they had paid in to the Social Security system, where benefits are calculated by a formula based on an individual’s top 35 years of earnings (with earnings from prior years adjusted to current prices as of the year of retirement eligibility based on an average wage inflation index).

The impact on the benefits any individual will receive will then depend on the individual’s wage profile over their lifetime.  Workers may typically have 20 or 25 or maybe even 30 years of solid earnings, but then also a number of years within the 35 where they may have been not working, e.g. to raise a baby, or were unemployed, or employed only part-time, or employed in a low wage job (perhaps when a student, or when just starting out), and so on.

There would thus be a good deal of variation.  In an extreme case, the loss of four months of contributions to the Social Security Trust Fund from their employment history might have almost no impact.  This would be the case where a worker’s income in their 36th year of employment history was very similar to what it was in their 35th, and the loss in 2020 of four months of employment history would lead to 2020 dropping out of their employment top 35 altogether.  But this situation is likely to be rare.

More likely is that 2020 would remain in the top 35 years for the individual, but now with four months less of payroll contributions being recorded.  One can then calculate how much their Social Security retirement benefits would be reduced as a result.

The formulae used can be found at the Social Security website (see here, here, and here).  Using the parameters for 2020, and assuming a person had earned each year the median wages for the year (see table 4.B.3 of the 2019 Annual Statistical Supplement of Social Security), one can calculate what the benefits would be with a full year of earnings recorded for 2020 and what they would be with four months excluded, and hence the difference.

In this scenario of median earnings throughout 35 years, annual benefits to the retiree would be reduced by $105 (from $17,411 without the four months of non-payment, to $17,306 with the four months of the payroll tax not being paid).  Not huge, but not trivial either when benefits are tied to a full 35 years of earnings.  That $105 annual reduction in benefits would have been in return for the one-time reduction of $669 in payroll taxes being paid (6.2% for four months where median annual earnings of $32,378 in 2019 were assumed to apply also in 2020 despite the economic downturn).  That is, the $669 not paid in now would lead to a $105 reduction in benefits (15.8%) each and every year of retirement (assuming retirement at the Social Security normal retirement age).

The loss in retirement benefits would be greater in dollar amount if the period of non-payment of the payroll tax were extended.  Assuming, for example, a scenario where it was extended for a full year (and one then had just 34 years of contributions being paid in, with the rest at zero), with wages at the median level throughout those now 34 years, the reduction in retirement benefits would be $316 each year (three times as much as for the four-month reduction).  Payroll taxes paid would have been reduced by $2,007 in this scenario, and the $316 annual reduction is again (given how the arithmetic works) 15.8% of the $2,007 one-time reduction in payroll taxes paid.

All this assumes Social Security would continue to pay out retiree benefits in accordance with current law and assumes the Trust Fund remained adequate.  The suspension of these payroll taxes would make this difficult, as noted above, unless there was then some general bailout enacted by Congress.  But any such bailout would raise further issues.

e)  If Congress were to appropriate funds to ensure the Social Security Trust Fund remained adequately funded, the resulting gains would be far greater for those who are well off than for those who are poor:

Suppose Congress allowed these payroll taxes to be “terminated”, as Trump has called for, but then appropriated funds to ensure benefits continued to be paid as per the current formulae.  Who would gain?

For at least this part of the transaction (the origin of the funds is not clear), it would be the rich.  The savings in the payroll taxes that would be paid in order to keep one’s benefits would be five times as high for someone earning $100,000 a year as for someone earning $20,000.  The tax is a fixed 6.2% for all earnings up to the ceiling (of $137,700 in 2020, after which the tax is zero).  The difference in terms of the benefits paid would be less, since the formulae for benefits have a degree of progressivity built-in, but one can calculate with the formulae that the change in benefits from such a Congressional bailout would still be 2.3 times higher for those earning $100,000 than for those earning $20,000.

One might question whether this is the best use of such funds.  Normally one would want that the benefits accrue more to the poor than to those who are relatively well off.  The opposite would be the case here.

f)  Importantly, none of this helps those who are unemployed:

Unemployment has shot up this year due to the mismanagement of the Covid-19 crisis, with the unemployment rate rising to a level not seen in the US since the Great Depression.  Unemployment insurance, expanded in this crisis, has proven to be a critical lifeline not only to the unemployed but also to the economy as a whole, which would have collapsed by even more without the expanded programs.

Yet cutting payroll taxes for those who have a job and are on a payroll will not help with this.  If you are on a payroll you are still earning a wage, and that wage is, except in rare conditions, the same as what you had been earning before.  You have not suffered, as the newly unemployed have, due to this crisis.  Why, then, should you then be granted, in the middle of this crisis where government deficits have rocketed to unprecedented levels, a tax cut?

It makes no sense.  Some other motive must be in play.

g)  This does make sense, however, if your intention is to undermine Social Security:

Trump pushed for a cut in the payroll taxes supporting Social Security when discussions began in July in the Senate on the new Covid-19 relief bill (the House had already passed such a bill in May).  But even the Republicans in the Senate said this made no sense (as did business groups who are normally heavily in favor of tax cuts, such as the US Chamber of Commerce), and they kept it out of the bill they were drafting.

The primary advisor pushing this appears to have been Stephen Moore, an informal (unpaid) White House advisor close to Trump.  He co-authored an opinion column in The Wall Street Journal just a week before Trump’s announcement advocating the precise policy of deferring collection of the Social Security payroll tax.  Joining Moore were Arthur Laffer (author of the repeatedly disproven Laffer Curve, whom Trump had awarded the Presidential Medal of Freedom in 2019), and Larry Kudlow (Trump’s primary economic advisor and a strong advocate of tax cuts).

Moore has long been advocating for an end to Social Security, arguing that individual retirement accounts (such as 401(k)s for all) would be preferable.  As discussed above, the indefinite deferral of collection of the payroll taxes that support Social Security would, indeed, lead to a collapse of the system.  Thus this policy makes sense if you want to end Social Security.  It does not otherwise.

Yet Social Security is popular, and critically important.  Fully one-third of Americans aged 65 or older depend on Social Security for 90% or more of their income in retirement.  And 20% depend on Social Security for 100% of their income in retirement.  Cuts have serious implications, and Social Security is a highly popular program.

Thus advocates for ending Social Security cannot expect that their proposals would go far, particularly just before an election.  But suspending the payroll taxes that support the program, with a promise to terminate those taxes if re-elected, might appear to be more attractive to those who do not see the implications.

The issue then becomes whether enough see what those implications are, and vote accordingly in the election.