Social Security, which is arguably America's most important social program for seniors, is on the precipice of being in deep trouble.
The program is currently bringing in more in revenue than it's paying out in benefits each year. However, by 2020, according to the Social Security Board of Trustees' 2016 report, the program will begin divvying out more money to beneficiaries than it's bringing in each year. Based on the Trustees' estimates, the program's more than $2.8 trillion in spare cash will be exhausted by 2034.
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Social Security isn't bankrupt, but it's not in good shape, either
If there is a silver lining here, it's that Social Security isn't going bankrupt, and it will be there to provide benefits for many future generations of retirees. Social Security is predominantly funded by the payroll tax, so as long as Americans keep working and keep paying FICA taxes based on their earned income, Social Security will always be generating revenue.
What isn't clear, though, is just how much retired workers in the future can expect from Social Security come retirement. As of the January 2017 snapshot from the Social Security Administration, the average retired worker was bringing home $1,363 each month. But if Congress is unable to figure out a way to fix Social Security's imminent slide, benefit cuts of up to 21% may be needed on an across-the-board basis to sustain it through 2090. This would, in 2017 dollars, put the average retired worker right on the cusp of the poverty rate. For millions of seniors and future retirees, that outlook is unacceptable.
Ironically, the holdup in Washington has nothing to do with how to fix Social Security. There have been well over a dozen different proposals to fix America's ailing social program. Perhaps the biggest issue is that Republicans and Democrats both (rightly) believe that their plans will work and help bridge Social Security's more than $11 trillion budgetary shortfall, and neither side has backed down.
Republicans often focus on these Social Security fixes
With Republicans currently possessing a majority in both houses of Congress, and budget director Mick Mulvaney no stranger to calling for reforms of Social Security, there's a genuine possibility that Republicans may choose to tackle Social Security reform during the Trump presidency.
What might a Republican reform of Social Security entail? Based on their history of Social Security proposals, one or more of the following four solutions would be likely.
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1. Raise the full retirement age
Unquestionably, the most likely solution to be proposed by Republicans in Congress is to raise the full retirement age.
Your full retirement age is the point at which the Social Security Administration (SSA) deems you eligible to receive 100% of your Social Security benefits. You can locate your full retirement age, which is based on your birth year, by using this handy table from the SSA. If you claim Social Security between age 62 (the earliest age you can do so) and the month prior to your full retirement age, you'll receive a permanent reduction in your monthly payout. If you wait until after hitting your full retirement age, your benefit will increase. On average, your benefit increases by 8% for each year that you wait to file.
The current full retirement age is slated to hit 67 by 2022 for persons born in 1960 and later. If Republican lawmakers get their way, the full retirement age might increase to 68, 69, or even 70. It's important to note that this wouldn't impact current retirees at all. However, it would mean that future generations of retirees may have to wait longer to collect 100% of their benefit. Either that, or they'd have to be willing to accept a steeper reduction in benefits.
The idea behind raising the full retirement age is that it would account for lengthening life expectancies, as well as encourage healthier seniors to remain in the labor force, thus encouraging them to save more and generating additional payroll tax revenue for the Social Security program.
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2. Tie Social Security's COLA to the Chained CPI
Another popular Social Security solution is to change how annual cost-of-living adjustments (COLA) are calculated. Social Security's COLA is the "raise" that beneficiaries get on a near-annual basis.
Currently, Social Security's COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average reading from the third quarter of the previous year serves as the baseline measure of a predetermined cost for a basket of goods and services, while the average reading in the third quarter of the current year serves as the comparison. If prices for this basket of goods and services rises, then Social Security recipients get a commensurate raise, rounded to the nearest 0.1%.
Republicans often want to abandon the CPI-W, implying that it doesn't accurately reflect the costs that seniors are facing. Instead, they'd like to see the Chained CPI used in its place.
The Chained CPI is set up in much the same way (i.e., measuring the change in price for a predetermined basket of goods and services), but with one pretty sizable difference. The Chained CPI takes substitution into account. In other words, if the price of a certain good or service becomes very high, the Chained CPI assumes the consumer will trade down to something more affordable. Thus, the Chained CPI grows at a slower pace than the CPI-W, providing smaller annual increases in pay to seniors.
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3. Means-test wealthier individuals
Republicans, including President Donald Trump, have also favored the idea of means-testing individuals prior to paying Social Security benefits.
The concept behind means-testing is pretty simple: reduce or halt Social Security benefit payouts to retired workers who have more than enough income or assets to live comfortably. During his campaign, Trump opined that he would forgo his own Social Security benefits during retirement, and that other wealthy Americans should do the same.
What might means-testing entail? Unfortunately few lawmakers have ever put their nose to the grindstone and come up with a specific dollar denomination, but as an example, individuals earning more than $80,000 or $100,000 per year in retirement might see their benefits reduced or halted altogether.
By itself, means-testing won't bridge Social Security's budgetary shortfall. However, when used in combination with other fixes it could narrow the gap.
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4. Partially privatize Social Security
Though it's the longest shot of them all, a partial privatization of Social Security can't be entirely ignored given that Donald Trump, Mike Pence, and a few notable members of his cabinet have, at one time, all supported the idea.
Privatizing a portion of Social Security means setting aside a percentage of an individual's payroll tax contributions toward the program into a separate account. This account would be managed by the individual and invested how he or she sees fit.
Why privatize? Right now, Social Security's more than $2.8 trillion in spare cash is entirely invested in special issue bonds and, to a lesser extent, certificates of indebtedness. Because the Federal Reserve has kept lending rates low for a long period of time, the rate of return on newly issued bonds has been between 1.375% and 3% -- not very appealing. Privatizing a portion of Social Security allows people the opportunity to seek out higher-yielding (but riskier) investments. It would also partially reduce the role of the federal government for retirees, which Republicans on Capitol Hill would probably like.
What's more likely?
Assuming Republican lawmakers do try to tackle Social Security reform, which is far from a guarantee, privatization isn't very likely. On the other hand, raise the retirement age, means-testing, and tying COLA to the Chained CPI all seem quite probable.
The good news for senior and future retirees is that Social Security reform is off the table for the 2018 budget. However, budget director Mulvaney has made it clear that changes could be suggested in 2019 and beyond.
