It took nearly a full year in the Oval Office, but President Trump and the Republican Party secured their first major legislative win last month when the Tax Cuts and Jobs Act was signed into law. It's the first major overhaul of the U.S. tax code in around three decades, and it speaks to one of the key promises that President Trump made while on the campaign trail.
Spending cuts are probably still on the GOP docket
However, tax reform comes with some big shoes to fill -- namely, the expectation that permanently lower corporate tax rates and temporarily reduced individual federal income-tax rates will balloon the federal deficit by around $1.5 trillion over the next decade. Part of this deficit is expected to be dealt with by economic growth created by lower taxes. In other words, higher wages and more job creation could increase what the federal government is expected to collect. Nevertheless, cuts are probably still needed.
One of the larger money-saving items in the recently passed GOP tax law was the elimination of the individual mandate associated with the Affordable Care Act (or Obamacare, as it's better known). The individual mandate is the actionable component of Obamacare that required people to purchase health insurance or face a financial penalty. Without this mandate, it's expected that millions will drop out of Obamacare, and thus the federal government will become less reliant on supplying federal subsidies for the Advanced Premium Tax Credit. Estimates suggest savings of $338 billion over the next decade.
Still, more cuts may be needed, and so-called entitlement programs like Social Security and Medicare may be in the crosshairs of the GOP.
Two key ways the GOP would cut Social Security benefits
While both Democrats and Republicans have a number of ways they'd consider fixing the shortcomings of Social Security, both of the core fixes for the GOP would act as a means to reduce long-term expenditures for the program.
First of all, a majority of Republican lawmakers on Capitol Hill strongly believe in raising the full retirement age. Your full retirement age is the age where the Social Security Administration deems you eligible to receive 100% of your payout. If you claim benefits between ages 62 (the first age of retired worker eligibility) and a month before your full retirement age, you accept a permanent reduction in your monthly stipend. If you wait until after your full retirement age to claim benefits, you can actually get a boost. Currently set to top out at age 67 in 2022, a number of GOP proposals have suggested increasing the full retirement age to 68, 69, or even 70, for future generations of retirees.
Raising the full retirement age doesn't impact current retirees, nor would it be likely to affect anyone born before 1960. However, future generations of retirees would either have to wait longer to receive 100% of their monthly payout, or be willing to accept a steeper reduction by claiming early. Either way, it means fewer lifetime dollars paid out to seniors.
The second way the GOP aims to save the program money is by switching the inflationary tether away from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Chained CPI. Both inflationary measures are pretty similar, with one key difference. The Chained CPI takes into account substitution bias, or the act of consumers trading down to a cheaper good or service when another gets too expensive (e.g., buying pork when beef prices are too high). Though this represents a real world choice consumers do make, it would wind up reducing the inflation factored into Social Security's annual cost-of-living adjustment.
Not so fast! The GOP may not seek Social Security reform after all
House Speaker Paul Ryan (R-Wis.) has made it no secret that reforming Social Security and Medicare are among his top priorities in 2018. However, even with current control of the legislative branch of the government, such a plan is looking more unlikely by the day.
Recently, Senate Majority Leader Mitch McConnell (R-Ky.) has all but declared entitlement reform dead ahead of next year's agenda. In a news conference in December, according to Politico, McConnell told reporters, "The sensitivity of entitlements is such that you almost have to have bipartisan agreement in order to achieve a result." Imagine that -- bipartisan cooperation!
But it's not just the lack of support from McConnell that could doom Ryan's chances of enacting reforms. There are two other factors at play here.
First, Republicans, like Democrats, don't just have a line-in-the-sand view on Social Security. There are conservatives within the party who lean very far to the right, and more moderate Republicans, some of whom would probably scoff at the idea of cutting benefits in any way for future generations. With just a one-seat majority in the Senate, getting a party consensus would be nearly impossible.
The other issue being that we're now in an election year. With midterm elections in November, the GOP would have to be careful not to completely tick off the voting base with Social Security or Medicare reforms, lest they could be voted out of office. At this point, the GOP seems more concerned with damage control following healthcare and tax reform debates than it does with pressing on with Social Security reforms.
Congressional kick the can continues in 2018
Nonetheless, this demonstrates the incredible rift in Washington when it comes to repairing the fractured Social Security system. Both parties have a means to fix the program, but neither has the support, speaking strictly on party lines, to make it happen. A middle ground is needed to come to a bipartisan solution, but neither party will back down when they have what they believe to be the winning ticket in their back pocket.
In short, it could be a long time before we see any serious discussion take place on Capitol Hill regarding Social Security reform.
The Motley Fool has a disclosure policy.