Ready or not, here come some big changes to America's most important social program.
According to the newest annual report from the Social Security Board of Trustees released in June, the program's costs are expected to exceed the revenue generated from its three sources of income by $1.7 billion this year. Though this isn't a particularly large number when compared to the nearly $2.9 trillion Social Security has in its asset reserves, it nevertheless represents a major shift and is the first net cash outflow since 1982.
Image source: Getty Images.
When looking at the bigger picture, Social Security's net cash outflow is indicative that the current payout schedule isn't sustainable. This is primarily due to three things: baby boomers are retiring and weighing down the worker-to-beneficiary ratio, life expectancies have been increasing for decades, and income inequality continues to grow. Ultimately, the Trustees believe that the only way to bridge Social Security's estimated $13.2 trillion cash shortfall between 2034 and 2092 and adjust for the expected depletion of its $2.9 trillion in asset reserves by 2034 -- assuming Congress passes no reforms -- is to reduce benefits across the board by 21%.
While the positive takeaway here is that Social Security is in no danger of insolvency, there's not exactly much comfort in knowing that benefits could be slashed by 21% for current and future generations. As a reminder, 62% of current retirees lean on Social Security to provide at least half of their monthly income, per the Social Security Administration.
Simply put, a fix is needed, and the longer Congress waits to act, the more painful that solution will likely be.
Donald Trump's Social Security "solution" aims to prove forecasters wrong
President Trump isn't oblivious to the fact that Social Security's long-term outlook is on somewhat shaky ground. During his campaign, he supported the idea that America uphold its promise to make guaranteed payments to eligible beneficiaries who'd paid into the system. But rather than approach Social Security head on, Trump has favored an indirect means of influencing the program.
Trump's not-so-secret weapon to tackle Social Security's many issues was to pass the Tax Cuts and Jobs Act. This sweeping tax overhaul, which modestly lowers many of the individual income tax brackets, as well as slashes the peak marginal corporate income tax rate to 21% from 35%, is expected to accelerate growth in the U.S. economy. Since Social Security's payroll tax -- a 12.4% tax on earned income of up to $128,400, as of 2018 -- accounted for $873.6 billion of the $996.6 billion collected in revenue last year, the thesis here is that a strong economy with low unemployment and higher wages will lead to more payroll tax revenue being collected.
Image source: Official White House photo by Joyce N. Boghosian.
Considering how important payroll tax is as a percentage of total revenue, and taking into account that U.S. gross domestic product (GDP) grew by 4.1% in the second quarter, its fastest pace since 2014, it's not out of the question that the Trustees are proven wrong in 2018 and 2019. In other words, there may be no net cash outflow after all, thanks to a stronger U.S. economy, as a result of the passage of the Tax Cuts and Jobs Act.
But there's only so far that indirect solutions can carry Social Security.
It's a certainty that Trump's Social Security fix will disappoint
Back in 2013 at the Conservative Political Action Conference, Trump didn't mince his words when he said:
As Republicans, if you think you are going to change very substantially for the worse Medicare, Medicaid and Social Security in any substantial way, and at the same time you think you are going to win elections, it just really is not going to happen... What we have to do and the way [to] solve our problems is to build a great economy.
In plainer English, Trump doesn't believe that directly addressing Social Security is a particularly smart move for Republicans to consider. The reason why is that no matter what solution is implemented, someone eventually comes out a loser. With election seats on the line, Trump cautions that tackling Social Security could mean handing over seats in the House and Senate to Democrats. It's for this reason that he prefers to focus on the economy as an indirect way of "fixing" Social Security.
Image source: Getty Images.
Unfortunately, I can say with almost concrete certainty that Trump's indirect Social Security solution is going to fail eventually.
Why, you ask? Blame the economic cycle.
Right now, we're in the midst of the second-longest economic expansion since the end of World War II at 109 months (and counting). It's taken a lot of help to keep the economy chugging along, including three rounds of quantitative easing from the Federal Reserve and now a major tax overhaul from Republicans that has put a lot of extra capital in the hands of corporations.
But the thing is, no matter what's done from a fiscal policy or monetary policy perspective, it's impossible to prevent the U.S. economy from going through periods of economic contraction or recession. This suggests that, at some point, payroll tax revenue growth could slow. There simply isn't a feasible scenario where the U.S. economy grows fast enough or with enough long-term consistency to erase a $13.2 trillion cash shortfall.
If President Trump is serious about securing Social Security for the future, the plain-as-day truth is that he's going to have to consider making compromises in order for that to happen.
