Social Security is arguably the most important social program in this country, with almost 67 million people a month receiving a Social Security check, Supplemental Security Income stipend, or both. Yet this all-important program is in deep trouble.
According to the Social Security Board of Trustees' 2017 report, the program will begin paying out more in benefits than it's generating in revenue by 2022. By 2034, a mere 12 years after Social Security begins hemorrhaging its approximately $3 trillion in asset reserves, they'll be completely depleted. Though the payroll tax, which generates the bulk of revenue for the program, will ensure that Social Security doesn't go bankrupt, an across-the-board cut in benefits of up to 23% is being projected for current and future retirees by that time. Considering that 62% of current retirees rely on Social Security for at least half of their income, a 23% reduction in that income isn't a cheery forecast.
There's a new Social Security solution being floated on Capitol Hill
The only group of people who have the power to change Social Security's path are lawmakers in Congress. Unfortunately, those lawmakers haven't been able to agree on anything when it comes to Social Security for years. Both Democrats and Republicans have a workable fix for Social Security, but since their plans work, neither is willing to back down and find a middle ground with the other party.
Worse yet, occasionally some really bad Social Security ideas work their way through the Congressional coffers. Right now, Sen. Marco Rubio (R-Fla.) and Donald Trump's daughter, Ivanka Trump, are drafting a bill that would allow new parents to take extended leave from work without being a burden to their employer. Under their proposal, working parents would be allowed to pull an early weekly benefit from Social Security, based on their earning history, while on parental leave, and in return they'd have to wait a bit longer before receiving Social Security retired worker benefits.
The proposal speaks to one of the many promises President Trump made during his State of the Union address to support working families with paid leave. By allowing an option for early withdrawal for new parents, these parents could have added financial security and not feel rushed back to work. It would, presumably, also help bolster Social Security's longer-term solvency by requiring that workers wait longer before claiming benefits.
But, as noted, the plan is flawed from the start.
Redirecting Social Security benefits to parental leave is a terrible idea
The biggest issue with Rubio's and Ivanka Trump's plan to redirect Social Security benefits is that the money simply isn't there. Though the bill would probably tout the need for parents to wait longer to claim retired worker benefit, it would probably be three to four decades before the program would see any reduced costs from such a move.
Meanwhile, redirecting Social Security dollars to parents would probably burn through the program's asset reserves even faster. Social Security currently has a $12.5 trillion funding gap between 2034 and 2091, based on its existing payout schedule. Therefore, unless new ways of generating revenue were incorporated into this bill, it would be expected to exacerbate, not lessen, the funding gap for Social Security -- or at least speed up the urgency to cut benefits across the board. That's not going to go over well with seniors and pre-retirees at all.
Another major flaw is that providing Social Security for parents on extended leave still provides a means to indirectly harm businesses. Even though enterprises wouldn't be directly on the hook for providing salaries to parents on extended leave, they'd suffer from reduced output as a result of not having an employee on leave doing their job. Add that up, and the impact of such a proposal could be quite detrimental to the U.S. economy.
Add this to a long list of really bad Social Security ideas
Of course, this is far from the only terrible Social Security idea we've seen.
Last year, Fox News reported that one of numerous Republican Social Security proposals being floated around Washington would have removed the payroll tax as the primary funding vehicle of the program. The 12.4% payroll tax is what comprised over 87% of the revenue collected by Social Security in 2016. In 2018, this tax is applicable to earned income between $0.01 and $128,400.
Replacing the payroll tax, which is currently what ensures that Social Security can't go bankrupt, would have been a value-added tax on consumption. Doing so not only would tie Social Security's fate to the economy, meaning it'd suffer tremendously during recessions when consumer spending fell, but it'd also throw the program into general government revenue. This would allow the federal government the liberty of deciding how much money would be apportioned to Social Security each year.
Another arguably atrocious idea was a limited privatization of the program, which was pitched in the mid-2000's under former President George W. Bush. Privatization would have allowed a small percentage of a workers' future benefits to be placed into an account for investment as the worker saw fit. Unfortunately, financial literacy isn't necessarily a strong suit of working Americans, meaning the risk of losing their investment was pretty high. That could have put lower-income workers on even shakier ground come retirement.
Put simply, Democrats and Republicans each have a valuable core fix. If they could work together to find a middle ground, the Social Security dilemma would likely be resolved. But until such time, we have to be on guard for some really bad ideas.
The Motley Fool has a disclosure policy.