If Trump Is Re-Elected, Expect Social Security Reform to Be a Priority
With no disrespect to Medicare, Social Security is arguably our nation's most important social resource. Each month, 63 million benefit checks are disbursed, of which close to 44 million are received by retired workers. Of these retirees, 62% rely on their payout to account for at least half of their income, with more than 15 million being singlehandedly pulled out of poverty as a result of their guaranteed stipend. If Social Security didn't exist, it's estimated that the elderly poverty rate would more than quadruple.
But just because it's America's most important social program doesn't mean it won't run into trouble.
Continue Reading Below
Social Security’s problems mount
According to the June 2018-released annual report from the Social Security Board of Trustees, the program is inching closer to a major, and unwanted, inflection point. Since 1983, the year the Reagan administration passed the last bipartisan overhaul of the program, Social Security has collected more cash than it's expended. These net cash surpluses have led to nearly $2.9 trillion in the program's asset reserves.
But possibly beginning in 2019, or presumably shortly thereafter, Social Security will pay out more than it collects. A number of ongoing demographic changes — e.g., the retirement of baby boomers, increased longevity, lower fertility rates, and rising income inequality — are expected to weigh on the program and whittle away at its asset reserves. With each passing year, the program's net cash outflow is forecast to grow. By 2034, all $2.9 trillion in excess capital is projected to be gone.
The silver lining here for seniors is that the program doesn't need a dime in excess cash to remain solvent. Social Security's two sources of recurring revenue, the 12.4% payroll tax on earned income and the taxation of benefits, will ensure that a lot of money is collected each year for disbursement to eligible beneficiaries.
However, a persistent net cash outflow from the program and the eventual depletion of Social Security's asset reserves would signify that the existing payout schedule isn't sustainable. With that being said, the Trustees report opines that an across-the-board benefit cut of 21% may be needed to sustain payouts by 2034. All told, the program is facing a $13.2 trillion cash shortfall between 2034 and 2092, and the American public is looking to President Trump and Congress to fix this mess.
President Trump has long preferred the indirect approach to fixing Social Security
For his part, President Donald Trump has shied away from making any direct changes to the Social Security program. Said Trump, while speaking at the Conservative Political Action Conference in 2013: "As Republicans, if you think you are going to change very substantially for the worse Medicare, Medicaid and Social Security in any substantial way, and at the same time you think you are going to win elections, it just really is not going to happen… What we have to do and the way solve our problems is to build a great economy."
In layman's terms, Trump doesn't believe that politicians can make direct changes to the Social Security program in an election year and not face adverse consequences. That's because all Social Security fixes would lead to some group of people ending up in worse shape than they were before the changes were made. It's feared that the backlash from this group could cause the incumbent party to lose an upcoming election.
Rather, Trump prefers the indirect approach to resolving Social Security's problems. The passage of Trump's hallmark legislation, the Tax Cuts and Jobs Act (TCJA), in December 2017 is at least partially geared at strengthening Social Security. The idea is that if the TCJA can create more jobs and help increase wages, then additional payroll tax revenue should be collected each year. Since payroll tax revenue represented nearly 88% of the $996.6 billion collected in 2017 by the program, a stronger economy could presumably provide a lift to Social Security.
In 2018, it looks as if Trump's indirect solution worked as planned. With the Trustees report having initially forecast a net cash outflow of $1.7 billion for the year, the end-of-year investment holdings report showed a net cash gain of almost $3.2 billion. The TCJA's policies may very well be responsible for a short-term lift in economic growth and payroll tax collection.
However, the indirect approach has no chance of being effective over the long run, because no matter what sort of fiscal policy is passed by the federal government or monetary policy implemented by the Federal Reserve, economic contractions and/or recessions are an inevitable part of the economic cycle. In other words, a direct fix is going to be needed to resolve Social Security's imminent cash crunch.
Should Trump be re-elected, Social Security reform efforts seem likely
The big question is: Would Trump ever consider direct solutions to the Social Security program? While completely hypothetical at this point, if he were re-elected in 2020, I believe there's a better than 50-50 chance he would seek to make direct changes to the Social Security program.
If Trump is successful in seeking a second term as president, he would no longer have to worry about any future elections for himself; although he would still have to concern himself with the make-up of Congress for the 2022 midterms. That might mean pushing off any direct proposals until 2023.
It was also reported in late 2017 by an unnamed source that President Trump told a member of Congress that he wouldn't touch Social Security "until the first day of his second term."
So, what might Trump have up his sleeve for Social Security? Chances are the focus would be on two core Republican reform proposals.
First, we'd likely see a recommendation that the current inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), be removed in favor of the Chained CPI. Interestingly enough, distaste for the CPI-W as a measure of inflation for Social Security might be one of the only things Democrats and Republicans actually agree on.
As things stand now, the CPI-W, which tracks the spending habits of urban and clerical workers, doesn't do a very good job of accurately tracking the expenditures of retired workers, who make up 70% of all beneficiaries. The GOP wants to replace the CPI-W with the same measure (the Chained CPI) they've indexed the federal tax brackets and credits to. The Chained CPI takes into account the idea of substitution bias, which is the act of trading down to a similar good if another becomes too expensive (i.e., buying chicken or pork if ground beef prices rise too much). While the Chained CPI does reflect a real consumer buying habit, it would ultimately result in smaller annual cost-of-living adjustments, thereby saving the program money over the long run.
The second core proposal you can expect is the idea of gradually increasing the full retirement age, or the age at which you become eligible to receive your full monthly payout, as determined by your birth year. Currently set to peak at age 67 in 2022, GOP lawmakers have lobbied for a gradual increase to as high as age 70. This would protect current and soon-to-be retirees from a smaller lifetime benefit, but would likely require future generations of retirees (millennials and Generation Z) to either wait longer to receive their full benefit or accept a steeper reduction in their monthly payout if claiming early.
Trump’s willingness to reform Social Security doesn’t mean anything will get done
However, it's important to recognize that even if Trump were to be elected to a second term, and if he were willing to tackle Social Security reform by cheerleading the GOP's two core solutions for the program, there's zero guarantee that any progress will be made.
One of the biggest obstacles to reforming Social Security is that amendments to the program are going to require 60 votes in the Senate. The last time either party had a supermajority (60 seats) in the Senate was 40 years ago. Put in another context, it means that Social Security proposals would need to be bipartisan to pass in the Senate, and getting either party to find common ground with their opposition is easier said than done.
Furthermore, a bipartisan solution would offer considerably better prospects of long-term success than a one-sided proposal from either party. For example, the Republican solutions, which address the program's longevity problems and reduce long-term expenditures, works too slowly to narrow Social Security's imminent cash crunch. Meanwhile, the Democrat solution of increasing taxable revenue provides a quicker fix to the program's cash problems, but can ultimately slow economic growth. Together, the core proposals from both parties would work to create a stronger Social Security.
What's next for the program is really anyone's guess at this point. But if Trump gains re-election, don't be surprised if direct reform proposals become a reality.
The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
Source: Read Full Article