Although it was a largely overlooked issue during the 2016 elections, President-elect Donald Trump was pretty clear during his campaign that he planned to leave Social Security alone.
Trump's belief is that America has a pledge to honor in paying retired workers, and it would continue to honor that pledge for years and generations to come. Rather than adjusting specific components of Social Security, Trump aims to grow the economy at a faster pace through a mix of individual and corporate tax cuts, renegotiated trade deals, and domestic infrastructure spending. The idea is that if the U.S. economy is growing faster, workers will be generating more income, yielding higher payroll tax revenue collection, and buoying the program.
The big hoopla over the future of Social Security is that if nothing is done to boost revenue, cut benefits, or enact some combination of the two, the Social Security Board of Trustees has forecast that the program will have exhausted its more than $2.8 trillion in spare cash by the year 2034. Should this happen, across-the-board benefit cuts of up to 21% may be needed to sustain payouts through 2090. Thus, Trump's hands-off proposal on Social Security, while not a defining fix, gave solace to some retirees and pre-retirees that -- for now at least -- their benefits wouldn't be altered.
Surprise! Republicans introduced a bill to drastically change Social Security
However, not all Republicans see eye-to-eye with President-elect Trump, and as I surmised a few weeks prior, it could mean the possibility of Trump's having to compromise on his pledge not to alter Social Security. Perhaps the biggest test comes from Rep. Sam Johnson (R-Tx.), the chairman of the Ways and Means Social Security subcommittee. On Dec. 8, Johnson unveiled his "plan to permanently save Social Security."
The 54-page bill, known as the Social Security Reform Act of 2016, covers a number of critical topics, most of which would revolve around reducing the rate at which benefits grow. Let's take a quick look at the key points of this Republican Social Security bill.
- For starters, Johnson's legislation would increase the full retirement age from 67, which is the current expectation of people born in 1960 and after, to 69 years of age by 2030.
- It would reduce cost-of-living adjustments (COLAs) for higher-earning individuals, while at the same time increasing benefits at a faster pace for lower-income retirees. In particular, individuals earning in excess of $85,000 and couples with more than $170,000 in earnings would have their COLAs completely cut out beginning in December 2018. The chained Consumer Price Index (CPI) would be used to calculate COLA increases for all other workers instead of the currently used CPI for Urban Wage Earners and Clerical Workers (CPI-W).
- Johnson's legislation would begin phasing out the taxation of Social Security benefits beginning in 2045 and ending by 2054. Currently, Social Security taxes a percentage of benefits if an individual earns more than $25,000 annually, or a couple earns more than $32,000. By 2053, the phased taxable limits would rise to $92,500 for an individual and $185,000 for couples. By 2054, this tax would be eliminated in its entirety.
- The bill would place a cap on the benefit amount for spouses and children of higher-earning retired and disabled individuals.
- It would eliminate the retirement earnings test, which applies only to people receiving benefits before hitting their full retirement age (FRA). In 2017, the Social Security Administration can withhold $1 in benefits for every $2 in wages earned above $16,920, and $1 in benefits for every $3 in wages earned above $44,880 if you'll hit your FRA in 2017 and are already receiving benefits. The earnings test would disappear by 2023, giving elderly working Americans the ability to double-dip with their wages and Social Security benefits.
- Finally, Johnson's legislation would raise the minimum benefit available to people who worked throughout their lifetime but failed to earn a lot.
Would the Social Security Reform Act of 2016 work?
The bill Sam Johnson introduced has some intriguing talking points that would address some long-standing problems with Social Security.
For example, raising the retirement age would indeed help account for what's been a pretty steady increase in average U.S. life expectancies over the past 50 years from about 70 years to nearly 79 years of age. Encouraging seniors to work longer (if they're healthy) will not only fill the payroll tax coffers a little longer, but it'll likely reduce the strain on the Social Security Trust by ensuring it pays out seniors for fewer years, since they'll probably be working longer.
This bill would also address the pesky taxation of benefits, which hasn't been adjusted since 1983. Initially, the taxation of benefits was only designed to affect about 1 in 10 households, but according to The Senior Citizens League in 2015, 56% of all seniors are paying some federal tax on their benefits. It would still be nearly 30 years before these taxes begin to adjust higher and phase out completely by 2054, but it would eventually mean more money in the pockets of most seniors come retirement.
There's also something to be said about capping COLAs for high-income individuals and couples. Even Donald Trump has opined in an off-the-cuff manner that high-income individuals who aren't going to be reliant on Social Security income should forgo receiving it. While Johnson's bill would still allow these high-income earners to receive their benefit, it would essentially be frozen in time, allowing for lower-income benefits to receive a much-needed boost.
However, Johnson's legislation isn't all cookies and cream. It has genuine flaws as well.
For example, it does little to address the disadvantage that roughly 60% of Americans who currently file for benefits before hitting their full retirement age would face by taking benefits early if the full retirement age is increased to 69 by 2030. Some retirees simply don't have a choice when it comes to taking benefits early. Be it poor health or their inability to find a job, filing for benefits at age 62 with an FRA of 69 could mean accepting a hefty lifelong reduction in benefits.
Second, the chained CPI may not be an appropriate answer to fixing how inflation factors into COLAs. Though proponents have suggested that the chained CPI would more accurately account for inflation, it tends to grow at a slower pace than the CPI-W -- and more important, it understates the inflationary impact of medical care and housing, which are already understated in the CPI-W. In other words, the chained CPI could cause seniors to fall even further behind the expense curve.
Also, completely eliminating the taxation of benefits by 2054 removes a source of revenue for a program that clearly needs more -- not less -- revenue. The thresholds for taxation should probably be amended for inflation since they haven't been touched since 1983, but some degree of taxation on upper-income earners is likely needed to provide extra revenue for the program.
More than likely, Johnson's Social Security Reform Act is a starting point for what's bound to be some intriguing discussions involving Social Security in the coming years and months. With Republicans sporting a clear-cut majority in the legislative branches of government, it's not out of the question that a Social Security reform bill could find its way to President Trump's desk once he takes office.
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.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.