Tag Archives: taxes

The Federal Deficit is High, Rising, and Unsustainable at This Level

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The federal fiscal deficit fell sharply in Biden’s first year and a half in office.  This was largely due to the expiration of the huge Covid relief programs that had been approved both during Trump’s last year in office and then at the start of Biden’s term (totaling $5.7 trillion, and equivalent to 12.8% of the GDP of 2020 and 2021 together).  The deficit was an astonishing 16.5% of GDP in the last 12 months of the Trump administration, and peaked at 19.2% of GDP in the 12 months leading up to March 2021.  It then came down rapidly, reaching a trough of 3.9% of GDP in the 12 months leading up to July 2022.  But it then turned upward, and is now at about 8.5% of GDP.

The figures are shown in the chart above.  They were calculated from the regular Monthly Treasury Statement released by the US Treasury, which has monthly figures on federal government receipts (revenues collected), outlays (expenditures in a broad sense), and the resulting deficit.  The most recent such statement (the one used here) was released in mid-August with figures through July.  The figures once published are rarely changed, and thus appear to be actual revenue and expenditure numbers and not estimates of what they were in any given month.

The figures will always bounce around substantially from month to month, due to factors such as when major payments on income taxes are due (e.g. each April), when expenditures are bunched (due to the fiscal year cycle), and other such seasonal factors.  Thus for the chart here I have calculated 12-month rolling totals for the figures, ending on the dates shown.  And I have expressed them as a share of average GDP over the period.  Since GDP figures are only available on a quarterly basis, I estimated month-to-month GDP figures based on an assumed constant rate of growth over the three months within each quarter.  The GDP figures were downloaded from FRED.

I also extrapolated the figures to the end of fiscal year 2023 – i.e. through to September 2023.  I suspect there will be a good deal of discussion on the sharp growth in the federal fiscal deficit in FY2023 when the full fiscal year figures are released in early October.  This post can be considered a preview, where while the final numbers will not be exactly the same as those estimated here, they will likely be close.

For the extrapolation, I assumed that federal outlays, receipts, and resulting deficits in August and September 2023 will be the same as they were in August and September 2022.  This was more reasonable than extrapolating the recent trend as the monthly figures fluctuate sharply due to seasonal factors, as noted above.  But it may well underestimate what the deficits will be in August and September 2023 due to the underlying upward trend of the past year.

For GDP for the third quarter of 2023 (where the preliminary estimate will not be released until near the end of October), I used the most recent forecast of third-quarter GDP growth produced by the Atlanta Fed.   The Atlanta Fed’s “GDPNow” forecasts have generally been quite good (far better than various consensus forecasts of panels of economists), and are based on a mechanical method where the forecast is first produced and then updated in real-time when key data are released – during the course of the quarter – on elements of what goes into GDP.  Correlations were worked out based on historical data, with those correlations then used – every time new data is released – to update the forecast of what GDP will be when an estimate is ultimately provided by the BEA at the Department of Commerce.

I have gone into a bit of detail on the Atlanta Fed’s GDPNow forecasting process as its most recent forecast (as I write this) is for GDP growth in the third quarter of 2023 to be quite high – at an annualized real growth rate of 5.9%.  This is a good deal higher than the most recent official (BEA) estimates of GDP growth of 2.4% in the second quarter of 2023 and 2.0% in the first quarter.  It is also substantially higher than the “Blue Chip” consensus forecast of a panel of economists of just 1.6%.  We will see who ends up being closer to the final figure on GDP growth, but for the chart above I used the 5.9% rate.  With this relatively high rate of growth for GDP, the federal deficit and other figures as a share of GDP will be biased in the downward direction.  Despite this bias (as well as that following from the use of 2022 figures for August and September, despite the upward trend in the deficit this year), the resulting federal fiscal deficit for FY2023 (which ends in September 2023) is conservatively estimated to be 8.5% of GDP.

A fiscal deficit of 8.5% of GDP in a period when unemployment is low is huge.  The unemployment rate has been at 3.7% or less (and as low as 3.4% – with this all within the range of statistical uncertainty) since March 2022.  It has not been at a level so low for such an extended period since 1968/69 – more than a half-century ago.  The increase in federal expenditures certainly in part accounts for this (Keynes is once again shown to have been right), but a fiscal deficit of 8.5% of GDP is not sustainable.

The gross federal debt held by the public (the relevant concept, as intragovernmental holdings of public debt will net out) was 95% of GDP as of 2022.  Round this up to 100% of GDP.  It is then easy to see that if one assumes, going forward, that real GDP growth will average 2.0% per year, say (it averaged 1.93% per year from 2000 to 2023), and if the inflation rate (the GDP deflator) matches the 2.0% Fed target for general consumer inflation, then the public debt to GDP ratio will remain flat if the fiscal deficit equals 4.04% per year (as that equals the compounded effect of 2.0% real growth and 2.0% inflation).  A fiscal deficit of 8.5% of GDP is far above this.  At such a deficit, the debt to GDP ratio will grow.  At a deficit of 4% of GDP or less, then with 2% growth and 2% inflation the debt to GDP ratio will fall from where it is now.

Why has the fiscal deficit grown by so much since the trough at 3.9% of GDP in July 2022?  I do not know enough about the fiscal accounts to say, but a few points can be made.  First, it was not due to rising interest rates.  While the US Treasury will need to pay higher interest rates on newly issued debt as the Fed has been raising interest rates, most Treasury debt is longer term and only comes up for renewal slowly over time.  According to the July 2023 Monthly Treasury Report, gross interest payments rose by $136 billion in the fiscal year to date (i.e. from October 2022 through to July 2023) compared to the same period in the prior fiscal year.  This is just 0.6% of GDP if one extrapolates it out to a full 12-month period,

In terms of the broad categories shown on the chart above, what was far more important was a fall in federal receipts (revenues) over the last year.  Federal receipts came to 19.6% of GDP in the 12 months leading up to July 2022, and fell to 16.8% of GDP in the (forecast) 12 months leading up to September 2023.  This was a reduction in receipts of 2.8% of GDP, and accounts for about 60% of the increase in the deficit during this period (which went from 3.9% of GDP to a forecast 8.5%, an increase of 4.6% of GDP).  An increase in federal outlays, rising from 23.5% of GDP in the 12 months leading up to July 2022 to 25.3% in the 12 months leading up to September 2023 (an increase of 1.8% of GDP), accounts for the other 40%.

I am not sure why federal receipts fell over the last year, but a guess would be that they rose in the period from early 2021 to mid-2022 (keeping in mind that these will always be for trailing 12-month periods) due to rebound effects from the Covid relief programs.  Those programs included deferral of when taxes would be due, and also provided for higher government expenditures on a variety of Covid-related activities.  These would translate into higher incomes, with this then leading to higher taxes later becoming due.  There was also major direct income support, although most of this was not taxable.

But for whatever reason, federal government receipts as a share of GDP have fallen substantially since mid-2022 and account for the major share (60%) of the increase in the deficit.  However, it is also important to note that while federal receipts have fallen relative to mid-2022, they are now (as a share of GDP) roughly where they were in early 2020, prior to the onset of the Covid crisis.  In fact, they are a bit higher, at 16.8% of GDP now compared to 16.5% in the 12 months leading up to early 2020.

Federal outlays are, however, substantially higher than where they were in early 2020.  They are now at 25.3% of GDP, versus 21.4% of GDP in early 2020, an increase of 3.9% of GDP.  This more than accounts for the increase in the fiscal deficit since then – rising from 5.0% of GDP in early 2020 (during the Trump administration but pre-Covid) to 8.5% now.  I have discussed before why the deficit of 5% of GDP during the Trump years (pre-Covid) was unwise, exceptional for a period when the economy was at full employment, and not sustainable.  The same is true with a deficit of 8.5% of GDP during a period when the economy is also at full employment.

Much of the new expenditures of the Biden administration are certainly high priority.  Climate change needs to be addressed, for example, and the US has long neglected its public infrastructure and there is an urgent need to repair it.  But I do not have a detailed breakdown of the expenditures, how they compare to expenditures before, and the needs being addressed.  But regardless, the now Republican-controlled House of Representatives will certainly force major cuts in federal expenditures, just as the Republican-controlled House elected in 2010 forced through major expenditure cuts during the Obama presidency.  Fortunately, the economy is now at full employment, while unemployment was still high in 2011 when the Republicans started to force major expenditure cuts on the Obama administration.  There had not been such cuts in fiscal expenditures with unemployment still high in periods recovering from a recession since before World War II.  The result was the exceptionally slow pace of employment growth following the financial and economic collapse of 2008/2009.

Attention should also be given to increasing fiscal revenues as part of a program to reduce the fiscal deficit.  A return of federal receipts to the approximately 18% of GDP share towards the end of the Obama presidency in 2016 would help in reducing the deficit to a sustainable level.  A good start would be to reverse the Trump tax cuts rammed through the Republican-controlled Congress in late 2017 on party-line votes – tax cuts that led to corporate income taxes being reduced by half and which introduced numerous new tax loopholes and other measures favoring the rich.  But with Republicans now in control of the House, that will of course not happen.

A deficit of 8.5% of GDP is not sustainable.  It will need to come down, with a deficit of 4% of GDP or less a reasonable goal.  There is a need for a constructive debate on how best to do this.  Unfortunately, given the state of American politics, it is unlikely that any debate will be constructive.

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Update:  October 31, 2023

Final figures have now been released for FY2023 federal government outlays and revenues, with the release of the September 2023 Monthly Treasury Statement. The initial estimate of GDP in the third quarter of 2023 has also now been provided.  From these, we can calculate what the federal fiscal deficit was as a share of GDP in FY2023, and compare that to the estimates made when only data through July 2023 were available.

The FY2023 fiscal deficit came in at 6.3% of GDP.  This deficit figure is still high – it is well above the 5% of GDP rule of thumb on when one should be concerned (in an economy at full employment), and above the figure of around 4% of GDP where the government debt to GDP ratio would be flat.

But the 6.3% of GDP deficit is substantially better than the 8.5% estimate provided in the post above.  That figure was based on extrapolations from data that, at the time, were only available through July 2023.  Why the difference?  It turns out to be due almost entirely due to substantially lower than expected fiscal outlays in the final two months of the fiscal year (i.e. August and September).  The estimates made in the post assumed that the fiscal deficit in August and September 2023 would be the same as the deficit in those two months in 2022.  But the deficit turned out to be 2.1% of annual GDP lower in 2023 than it was in those same two months in 2022.  Within round-off, this is the same as the 2.2% of GDP difference between the 8.5% of GDP forecast, and the 6.3% of GDP realization.

This was basically entirely due to lower federal expenditures (outlays).  Those expenditures were 2.3% less, in terms of annual GDP, in August and September 2023 than they were in those two months in 2022.  Federal revenues were also a bit less, but only by 0.2% of annual GDP.

Note that all these figures have been presented in terms of annual GDP for the fiscal years 2022 or 2023.  But GDP is a flow, and GDP in just the two months being considered will of course be far less.  Based on the advance estimate of GDP in the third quarter of 2023, and assuming GDP in the two months will be two-thirds of that in the three months in the quarter (and also taking GDP at the quarterly, not annual, rate), the reduction in the deficit in those two months relative to the same two months in 2022 comes to 12.3% of the GDP of those two months.  That is gigantic!  While there is substantial volatility in the monthly figures, it is surprising that fiscal expenditures would change by so much in that period compared to what it was in the same period of the prior year.

 

 

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.

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.