In just over five weeks, the American public will head to the polling booths and decide who will become the 45th President of the United States. Regardless of the outcome, we're going to witness a first: either the first woman president or the first president with no prior political or military background.
Among the key issues in the 2016 presidential election is the future of Social Security. It's no secret that Social Security is in trouble. The Old-Age, Survivors, and Disability Insurance Trust (OASDI), which pays out benefits to more than 60 million people each month, is forecast to exhaust its $2.8 trillion cash reserve by the year 2034.
The good news is that Social Security won't be going bankrupt even if its spare cash runs dry, which means it will be there for future generations. Essentially, the program would become budget-neutral, paying out in benefits what it receives in payroll taxes. The Trustees report estimates that this could lead to an across-the-board benefits cut of up to 21% if Congress fails to act. Considering that nearly 6 in 10 seniors rely on Social Security for half of their monthly income or more, this isn't exactly an encouraging outlook.
Democratic presidential nominee Hillary Clinton believes she has a way to fix Social Security. Let's go over Clinton's two-pronged Social Security solution.
Expand Social Security benefits for the poor, women, and caregivers
Clinton's Social Security proposals revolve around two tenets: expanding benefits to those who are disadvantaged and generating more revenue from wealthier Americans.
For starters, Hillary Clinton doesn't just want to extend the survival of Social Security. She wants to expand the benefits offered to retired Americans, especially those with low incomes who rely on Social Security income to make ends meet. Based on the latest data from the Social Security Administration, 10% of all recipients are living below the federal poverty line, and another 5% are only 25% above the federal poverty line. Clinton's goal is to push benefits up for these Social Security recipients so they can live more comfortably in retirement.
Clinton is placing a particular focus on women and caregivers. Women's work histories tend to be shorter than those of their male counterparts, as they're often the ones who wind up taking care of children in the home and caring for sick family members or friends. This leaves women with smaller average benefits, and Clinton wants to change that.
Have the wealthy pay more into Social Security and remove certain exemptions
The other key component of Clinton's Social Security plan is generating extra revenue by taxing wealthier Americans.
Currently, there's an earnings cap on the payroll taxes that fund the OASDI. All earned income up to $118,500 is taxed at 12.4%, and all income above that threshold is free from tax. (That cap is adjusted as needed to account for inflation.) Since the majority of Americans earn less than $118,500 annually, most workers are paying into Social Security with every dollar they earn, while the highest-income Americans can avoid paying tax on some, or most, of their income.
Clinton's solution is pretty simple: raise the payroll earnings tax cap. Though Clinton hasn't proposed a specific earnings cap during this election cycle, the $200,000 level was cited in Clinton's 2008 presidential bid. Given inflation, $250,000 may be a more appropriate consideration, though nothing is written in stone at this point.
If the payroll earnings tax cap were lifted to $250,000, it would allow for normal payroll tax collection up to $118,500, allow a payroll tax moratorium on earned income between $118,500 and $250,000, and reinstitute the 12.4% tax on earned income above $250,000.
Clinton has also suggested that she would consider taxing income that currently doesn't count toward your Social Security tax liability. For example, dividends from stocks, interest from loans, income received from a limited partnership, and rentals from real estate aren't taxable by Social Security now. Clinton would consider removing these exemptions for wealthier Americans.
Would it work?
On one hand, Clinton's plan to expand benefits for those who've been disadvantaged by the Social Security program since its inception, such as women and caregivers, would likely receive a lot of support. And the added focus on lower-income persons could put more retirees on solid financial footing.
Furthermore, having the rich pay a larger share of their income into Social Security is an idea that has found broad support. In an informal 2014 poll from The Washington Post that asked online readers to indicate which proposed Social Security fixes they would support, "removing the payroll tax cap" had a commanding lead. More than two-thirds of readers (69%) chose this option, compared to just 44% for the second-most popular fix. In other words, Clinton would likely have the public's support to raise the payroll earnings tax cap.
On the other hand, the Center for Retirement Research (CRR) at Boston College, which presented the potential Social Security fixes to readers, along with their pros and cons, notes that removing the payroll earnings tax cap would only alleviate about 30% of the expected budgetary shortfall in the OASDI. In short, we may need to do more than tax the rich to fix Social Security's problems.
Furthermore, the CRR's estimates assumed that benefits paid would rise in step with inflation. Clinton doesn't want benefits to tread water; she wants to expand them for low-income Americans, women, and caregivers. This may imply that Clinton could struggle to garner enough funding to expand Social Security for those who need it most.
Will Clinton's Social Security plan work? Now that you have the facts, that's up to you and the nearly 219 million eligible voters to decide.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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