For better or worse, Social Security is our nation’s most prized social program. It’s responsible for divvying out benefits to more than 63 million people each month, 70% of whom are retired workers, and it keeps an estimated 22 million beneficiaries out of poverty. Without Social Security, the Center on Budget and Policy Priorities projects that the elderly poverty rate would more than quadruple to over 40%!
What I’m getting at is that Social Security is vital to the financial well-being of our nation’s seniors, and doing anything that could adversely impact the program over the long run isn’t advised.
Social Security has a $13.9 trillion problem… and climbing
Of course, Congress has been doing something that’s been hurting Social Security for decades: nothing.
Lawmakers have known since 1985, via the annually released Social Security Board of Trustees report, that the program wasn’t expected to bring in sufficient capital to maintain its existing payout schedule over the long term, which is defined as the next 75 years.
That means Congress has had 34 years to put forth workable middle-ground solutions, and virtually no progress has been made.
According to the 2019 Trustees report, Social Security now sits less than 16 years away from completely exhausting the nearly $2.9 trillion in asset reserves that have been built up since inception.
If or when this excess capital is depleted, across-the-board benefit cuts of up to 23% could be passed along to then-current and future retired workers. That’s a problem, with 34% of current retirees leaning on Social Security for at least 90% of their income, and 62% counting on the program for at least half of their income.
In other words, progress needs to be made on Capitol Hill to resolve Social Security’s forecasted $13.9 trillion cash shortfall between 2035 and 2093, and fast.
However, an idea thrown around by President Trump last week, even if it was just off-the-cuff, could put the Social Security program in even worse shape than it already is.
Trump prefers a hands-off approach to resolving Social Security’s cash shortfall
The interesting thing about Trump is that he’s taken a relatively hands-off approach to Social Security since running for and being elected president. Back in 2013, while speaking at the Conservative Political Action Conference, Trump had this to say (quote courtesy of the Washington Times):
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 to solve our problems is to build a great economy.
Essentially what Trump is conveying is that the political party that does make direct changes to the Social Security program is going to suffer during election time. That’s because all direct changes to the Social Security program will result in at least one group of people being worse off than before, whether that’s the rich or future retirees.
Instead of making direct amendments to the Social Security program, Trump has favored indirectly influencing Social Security by bolstering the U.S. economy. The idea being that if workers are earning more, then Social Security’s 12.4% payroll tax on earned income should bring in more revenue, leading to a healthier annual net-cash surplus.
The president’s flagship legislation, thus far, has been the passage of the Tax Cuts and Jobs Act (TCJA), which completely overhauled the individual and corporate income tax schedule in the United States. In doing so, the TCJA appears to have provided a temporary boost to economic growth (vis-a-vis U.S. gross domestic product), but it’s unclear how sustainable this “boost” in GDP growth will be over the intermediate and long term.
This Trump proposal would be potentially disastrous for Social Security
However, with fears of a recession in the U.S. building following the recent inversions of the U.S. yield curve, Trump reportedly tossed around the idea of a payroll tax cut to put more money into workers’ pockets and stimulate the economy. If you’re curious, he wouldn’t be the first president to do this, with President Barack Obama enacting a temporary payroll tax cut in 2011 and 2012.
The cuts passed along by President Obama saw the payroll tax liability of most workers (i.e., those who work for someone else or a company) fall from 6.2% to 4.2% for a two-year period, thereby putting more money into the hands of consumers to boost spending, which is important since consumption accounts for about 70% of U.S. GDP. On the other hand, it collectively reduced the amount of payroll tax collected by Social Security by more than $215 billion.
Even though Trump has backed off the idea of enacting a temporary payroll tax cut as sort of an emergency measure to prevent a possible recession, the simple fact that it was even on the table is somewhat scary.
As noted, Social Security is contending with a $13.9 trillion cash shortfall that’s only growing by the year. In each of the past two years, the long-term shortfall has risen by $700 billion, demonstrating that the longer lawmakers wait to act, the more painful the fix will be on working Americans. But temporarily crippling Social Security’s workhorse revenue producer, the payroll tax, simply to provide a boost to consumer spending would amount to short-term gains in exchange for long-term pain.
My personal suspicion is that if any temporary payroll tax cut were enacted, the gain in GDP would be relatively minimal, while the depletion of Social Security’s asset reserves would be expedited. In layman’s terms, the aforementioned cut to benefits could happen even sooner than expected if Trump were to enact a temporary payroll tax holiday of some form.
The good news, as stated, is that Trump has removed that possibility from his agenda, citing that the U.S. economy is strong and not in need of recession protection. Nevertheless, that such an idea could be brought up again is worrisome, both for current and future retirees.
— Sean Williams
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Source: The Motley Fool