Whether you're a current retiree or a worker readying to retire in a few years or decades, odds are you'll be at least somewhat reliant on Social Security. As of this year, 55% of current retirees consider it a "major" source of income, compared to just 10% who didn't consider it a needed source of income at all, according to national pollster Gallup. Comparatively, 79% of non-retired adults in 2017 expect Social Security to be a "major" or "minor" source of income during their golden years.
While Social Security has long been a rock-solid foundation for retirees, the disabled, and even survivors of deceased workers for more than 75 years, that foundation is starting to crack. Namely, ongoing demographic changes in the U.S. could dramatically change the face of Social Security in less than two decades.
Social Security is less than two decades from a potential disaster
The latest Social Security Board of Trustees report, released in July, forecasts that in 2022, Social Security will begin paying out more in benefits than it's collecting in revenue from payroll taxes, interest income, and the taxation of benefits. By 2034, the nearly $3 trillion in asset reserves are expected to be completely gone. The blame for this lies with a confluence of factors including the mass retirement of baby boomers, a steady lengthening of life expectancies, and the longevity gap between the rich and the poor.
Long story short, it's pretty evident that a fix is needed for Social Security, and only Congress can produce one.
Unfortunately, progress on fixing Social Security is at a standstill in Washington. Part of the blame falls on President Trump, who has no intentions of touching Social Security, as per his campaign pledge. With Congress instead focused on healthcare and tax reform, there's simply no room on the docket for Social Security.
The other issue is the partisanship of Washington. Solutions to fix Social Security clearly aren't the issue. Both Democrats and Republicans have produced plans that would adequately address the projected $12.5 trillion cash shortfall through 2091. But herein lies the issue: Both parties have a workable solution, ergo neither side will back down and consider finding common ground with the other party. This is the primary reason why Social Security remains broken.
Steven Mnuchin has an idea -- and it's a bad one!
One figure within the Trump administration that you might expect to be a voice of reason regarding Social Security is Treasury Secretary Steven Mnuchin. After all, the program's Board of Trustees is a six-member panel, and Mnuchin is one of the six, by default. He, of all people, should understand how urgently Social Security's issues need to be addressed.
However, here's what Mnuchin had to say last month, shortly after the Trustees report was released: "To help make [Social Security and Medicare] more sustainable into the future, we should focus on strengthening the economy today. Compounding growth will help ease projected shortfalls."
Mnuchin's comments suggest that strengthening the economy will help boost wages and income for many Americans, thereby increasing the amount of payroll tax revenue collected by Social Security. In 2016, 87.3% of the $957.5 billion in income for the program was derived from payroll taxes. Mnuchin, along with Trump, believes that cutting individual and corporate income-tax rates will achieve a consistently higher GDP growth rate, and higher incomes along with it.
Unfortunately, Mnuchin's theory has two fatal flaws that he should plainly see as Treasury Secretary and as a member of the Board of Trustees. First, Mnuchin has wrongly implied that economic growth is consistent over time. History shows that peaks and troughs are a normal part of the economic cycle, meaning that any accelerated growth from tax reforms would only be temporary on a larger scale. In short, tax reform is a possible Band-Aid, not a permanent fix.
Secondly, as Mnuchin states in his comments, economic reforms "will help ease projected shortfalls." Not fix, but ease. Mnuchin is looking at ways not to fix Social Security, but rather to lessen the imminent cash shortfall of the program. That's not a smart strategy in this writer's opinion.
Mind you, Mnuchin is also the person who, in June, suggested that if the Republican-led Congress were to pass Social Security reforms, including benefit cuts, the White House may indeed sign it.
We need a bipartisan approach
In order to fix Social Security for the long term, there's a strong likelihood that we'll need to see a compromise between the major political parties. Imagine that -- Republicans and Democrats working together on Capitol Hill.
A strong Social Security solution would likely involve some of each party's core Social Security principles.
For Democrats, we'd be talking about increasing taxation for the wealthy. Currently, all earned income between $0.01 and $127,000 is taxed at a rate of 12.4%, with most workers paying only half (6.2%) and their employers covering the other half. However, for the roughly one-in-10 workers who earn more than $127,200 a year, income above this threshold is free from Social Security's payroll tax. Democrats want to reinstitute the payroll tax on earned income above, say, $250,000 or $400,000 so that the wealthy pay more.
Meanwhile, Republicans want to index benefits to account for increased longevity. When Social Security was rolled out in the 1940s, it was only designed to pay benefits for a few years. Today, many seniors collect benefits for two decades or longer, thanks to Americans' lengthening life expectancies. Republicans propose increasing the full retirement age (the age at which you can collect 100% of your retirement) to 68, 69, or 70, from the peak of 67 years that we'll reach in 2022. This would require seniors to either wait longer to collect 100% of their benefits or to accept a bigger reduction in their payout by claiming sooner.
These two proposals could strengthen Social Security for future generations, but Congress has yet to take the hint.