The Social Security program is vital to the financial livelihood of tens of millions of senior citizens. Unfortunately, it's also a program that's in dire need of assistance from Washington.
Are Social Security benefits going to be cut?
When Social Security came into being more than 80 years ago, the program's architects never foresaw the rapid rise in baby births after World War II, nor could they have foreseen that improved health education, medicines, and access to healthcare would so dramatically lengthen life expectancies in the United States. Today, the ongoing retirement of baby boomers and longer life expectancies are weighing on Social Security.
According to the Social Security Board of Trustees 2016 report, the program will begin paying out more than it's bringing in by the year 2020, ultimately resulting in the complete depletion of its more than $2.8 trillion in spare cash by 2034. Should this spare cash be eliminated, Social Security would essentially become a budget-neutral program. In other words, what's collected via payroll taxes would be redistributed to beneficiaries.
Should Social Security become budget-neutral, it would almost certainly mean that existing and future beneficiaries would receive less each month. The Trustees report estimates that an across-the-board benefits cut of up to 21% may be needed to extend the life of the program through 2090, assuming Congress makes no changes to the current Social Security laws.
In short, the closer we move to 2034, the more urgent it becomes for the president and Congress to act.
President Trump's take on Social Security reform
During his campaign, President Trump made it crystal clear that he had no intentions of altering Social Security directly. In Trump's opinion, America has a promise to keep with its senior citizens, and that involves keeping the current benefit structure for Social Security as-is.
Instead of directly making changes to Social Security, Trump's proposals focus on indirectly helping the program by focusing on economic growth. In theory, if Trump can increase the GDP growth rate and simultaneously increase the income of the average American worker, then more money should be collected via payroll taxes, which are the primary source of funding for the Social Security program.
Trump plans to accomplish his goal of faster economic growth primarily by focusing on tax reform. Trump's campaign proposals (which may not be exactly the same once Congress makes some expected adjustments) would simplify and lower individual tax brackets, as well as dramatically cut corporate income tax rates.
In addition to tax reform, Trump has plans to boost infrastructure spending, renegotiate foreign trade deals, and deregulate a number of industries to promote growth, including the banking and energy sectors.
Great news for Social Security beneficiaries
Despite Trump's pledging to leave Social Security alone, there has been some consternation that Republicans, who currently control the legislative branch of the federal government, could push for Social Security cuts in the 2018 budget in order to reduce the federal deficit. The good news for Social Security beneficiaries is that a benefits cut is clearly not on the table for 2018.
In a recent interview on Fox News' Sunday Morning Futures, U.S. Treasury Secretary Steven Mnuchin noted that Trump's top budget priority for the upcoming year is on tax reform and not cutting entitlements. In Mnuchin's own words, based on a transcript provided by Fox to Fortune:
"We are not touching those [Social Security and Medicare] now. So don't expect to see that as part of this budget, OK. We are very focused on other aspects and that's what's very important to us. And that's the president's priority."
Not only are Social Security funding cuts not in the 2018 budget, but a stronger COLA may also be on the way for retired workers. Bureau of Labor Statistics data from January shows that the annual inflation rate hit 2.5%, which is its highest level in five years, mostly on account of higher energy prices. The Consumer Price index for Urban Wage Earners and Clerical Workers (CPI-W) determines the annual cost-of-living adjustment (COLA) for Social Security each year. In recent years, the CPI-W has been dragged down by lower energy prices. However, energy prices have been substantially stronger on a year-over-year basis.
In short, Social Security recipients won't be worrying about a benefits cut in 2018 and they could be in line for a healthy COLA.
Social Security's future is still murky at best
But it's probably best to hold off on uncorking the champagne just yet. Even though Trump has regularly denied that he would directly alter Social Security, he's surrounded himself with lawmakers who strongly believe in modifying and potentially cutting it.
For example, Trump's budget director Mick Mulvaney is a strict fiscal hawk. In simpler terms, he's all for a balanced budget, which means making spending sacrifices in certain areas, perhaps including entitlement programs such as Social Security.
Previously, Mulvaney has supported increasing the full retirement age to 70 from the expected 67 that'll be reached by 2022. Your full retirement age is the point at which you're entitled to 100% of your monthly benefit. Increasing the full retirement age wouldn't hurt already retired workers, but it would reduce payouts for future generations of retirees by forcing them to either wait longer to receive 100% of their monthly benefit or accept a steeper reduction in their payout by claiming early.
Yet, Mulvaney is far from the lone wolf. Former Dallas mayor Tom Leppert, who Trump chose as his Social Security adviser, previously trumpeted an idea that would partially privatize Social Security. Privatization involves moving a percentage of a beneficiary's future payouts into a separate retirement account that they would be allowed to invest as they see fit. Leppert, like many Republicans, would like to see as little involvement from the federal government as possible, meaning placing some of the onus of retirement back on working Americans.
While Social Security appears to have escaped any major modifications for the 2018 budget, Trump may have little choice but to accept the possibility of overhauling Social Security in 2019, or soon thereafter.