The Social Security program is coming to a crossroads.
Based on the latest report from the Social Security Board of Trustees, by 2020 the program will be at an inflection point. Up until that year, the Social Security Administration, through payroll tax revenue collection, interest earned on its $2.8 trillion in spare cash, and revenue generated from the taxation of Social Security benefits, will be bringing in more money than it's paying out. Beginning in 2020, this trend will reverse on account of a growing number of retiring baby boomers and lengthening life expectancies, resulting in cash outflows outpacing cash inflows.
The trustees report is forecasting that by 2034 the program will have completely exhausted its spare cash. While that doesn't mean Social Security is insolvent, it does mean adjustments would be needed to sustain the program for generations to come. Operating as a budget-neutral program (i.e., what's paid out is equal to what is received via payroll taxes and taxed Social Security benefits) could mean an across-the-board benefits cut of up to 21%. Considering that more than 60% of all seniors receiving benefits rely on Social Security to provide at least half of their monthly income, this is a frightening outlook for America's most treasured social program.
These Social Security proposals may not get the job done
This is why the future of Social Security is such a hotly contested talking point during the election season. Both presidential candidates, Democratic Party nominee Hillary Clinton and Republic Party nominee Donald Trump, have laid out their vision for how they'll safeguard Social Security for current retirees and future generations. But the proposals that both candidates have offered are probably going to fall short of fully fixing Social Security's budgetary shortfall.
Hillary Clinton's fix probably doesn't go far enough
Both Hillary Clinton and Democratic vice-presidential nominee Tim Kaine have recognized that Social Security has been on a slippery slope for years, which is why both have been championing the idea of raising the payroll tax earnings cap.
The current payroll tax cap on earnings is $118,500, meaning any earned income between $1 and $118,500 is taxed at 12.4%, while earned income above this figure is free and clear of being taxed for the purpose of Social Security. Nearly 9 in 10 Americans earn less than $118,500 annually, so most workers are paying this tax on every cent they earn, while well-to-do individuals are only paying this tax on a smaller percentage of what they earn.
Clinton's proposal is simple: tax income beyond the current payroll tax earnings cap so wealthier individuals contribute more into the system. Though she hasn't outlined a specific payroll tax cap, in a town hall meeting during the 2008 presidential elections she mentioned $200,000. Given inflation since that election, $250,000 is another figure pundits have thrown around. Under such a scenario, workers would continue to pay the 12.4% payroll tax (which is often split down the middle with the employer) on earned income between $1 and $118,500, and earned income above either $200,000 or $250,000 would also be subject to this 12.4% tax. Presumably, earned income between $118,500 and $200,000 (or $250,000) would be exempted from the payroll tax.
The reason I'd opine that Clinton's program may not go far enough to fix Social Security's budgetary shortfall rests with a forecast from the Center for Retirement Research (CRR) at Boston College. CRR predicted that adjusting the payroll tax cap would have a maximum impact of eliminating about 30% of the budgetary shortfall. Though it would help push the aforementioned 2034 spare-cash depletion date further out, it wouldn't completely solve Social Security's cash flow crisis.
What's more, Clinton hasn't just proposed staying the course on Social Security benefits. She aims to boost benefits for women and caregivers. Women are often the ones who take time off of work to raise children or take care of sick family members or friends, which leaves them at a disadvantage in terms of lifetime earnings and monthly benefit payments come retirement. Clinton wants to change that. However, altering the current payout structure could put even more stress on the trustees' projections, and it may also reduce the positive benefit of raising the payroll tax cap.
Clinton's proposals simply may not go far enough if she wants to fix Social Security for future generations.
Donald Trump's fix likely has too many what-ifs
On the other hand, Donald Trump and running mate Mike Pence have taken a very hands-off approach to Social Security. Trump firmly believes that the federal government has an obligation to ensure that retired workers continue to receive the income they've been promised throughout their lifetime. In other words, Trump has no plan in place to change a thing with Social Security itself.
Instead, Trump's Social Security plan revolves around adjusting individual and corporate taxes, reforming healthcare, and cutting wasteful Washington spending in an effort to reduce the federal budget and spur economic growth. If the economy grows by 4% per year, as Trump has suggested, it could boost workers' take-home wages and increase the amount of payroll tax revenue collected by the Social Security Administration, alleviating the imminent cash outflow by 2020.
Though Trump has offered a small army of economic proposals, it's his corporate income tax proposal that's by far his most aggressive. The U.S. currently has one of the highest corporate income tax rates in the world at 35%, but if Trump gets his way it'll be reduced to just 15%, which would be one of the lowest among the developed countries. Trump believes that lowering corporate income tax rates will spur businesses to hire and reinvest in themselves through innovation, and could even encourage foreign investment in the United States.
Unfortunately, Trump's economic proposals come with a number of what-ifs, and if these proposals don't lead to a 4% GDP growth, or higher, the Social Security program could still find itself short on cash.
Most analyses of Trump's economic proposals expect the U.S. national debt to increase at a faster pace than it would under Clinton's economic proposals. Additionally, Trump's proposals would appear to benefit the well-to-do more than they would any other income class, which may exacerbate income inequality in America. There simply aren't any guarantees that this extra cash in American pocketbooks would translate into the desired 4% annual growth rate.
Both candidates have offered intriguing and unique proposals to fix Social Security, but it's unlikely that either nominee will get the job done without further building upon their established proposals.
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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