You may not like what I'm about to say, but it's the unaltered truth: Social Security, America's most important social program that is responsible for keeping more than 22 million Americans out of poverty each year, is in big trouble.
Big changes await Social Security in less than two decades
The newest report from the Social Security Board of Trustees, released in early June, estimates that the program will hit a major inflection point this year. Namely, it'll expend more than it collects in revenue for the first time in 36 years. This net cash outflow, which is expected to start small, will really begin picking up steam in 2020 and beyond. By 2034, the $2.9 trillion that's been built up in excess cash since 1983 is projected to be completely gone.
Now, before your imagination runs wild, there is good news -- this being that Social Security is in absolutely no danger of going bankrupt. While the overlying concept of the program running out of its excess cash probably seems scary, it's not as if its revenue-generating capabilities are ceasing. The program's 12.4% payroll tax on earned income and its taxation of benefits will keep collecting income that the Social Security Administration can disburse to eligible beneficiaries.
But the depletion of Social Security's excess cash is a clear warning sign that the current payout schedule isn't sustainable. Should Congress fail to find a way to resolve what's expected to be a $13.2 trillion cash shortfall between 2034 and 2092 (based on the current benefit schedule), a cut to benefits for current and future retirees of 21% may be needed by 2034. Now this is what should have folks concerned.
You see, Social Security comprises at least half of all income for 62% of retired workers, and represents virtually all income (90%-plus) for 34% of retirees. If their major income stream were suddenly slashed by 21%, we could be looking at a significant increase in elderly poverty rates.
Will midterm elections finally bring much-needed reform to Social Security?
That begs the question: When will Congress act? After all, lawmakers have known about Social Security's funding concerns since 1985, so it's not as if the program's issues are coming out of left field.
With midterm elections around the corner, you might be wondering if this could provide an opportunity for long-awaited reform. Well, folks, the answer is almost a resounding "no." Regardless of the makeup of Congress following the November elections, it's going to be virtually impossible to get anything done from a Social Security policy perspective over the next two years.
In order for amendments to be made to Social Security, 60 votes are needed in the Senate. The last time a supermajority existed in the Senate -- i.e., one party holding 60 or more seats in the Senate -- was four decades ago. While nothing can be said with any certainty when it comes to politics, it's unlikely that either party will even come close to having 60 seats in the Senate after the midterms.
The reason this figure is so important is because Democrats and Republicans are like oil and water when it comes to Social Security solutions. They pretty much couldn't be further apart. Democrats prefer increasing revenue by lifting or eliminating the payroll tax cap on earned income of $128,400, as of 2018. Essentially, it would require high-income earners to pay more into the program. Conversely, Republicans want to reduce long-term expenditures by raising the full retirement age -- i.e., the age at which you become eligible to receive 100% of your retirement benefit, as determined by your birth year.
Both Democrats' and Republicans' Social Security fixes work to eliminate the estimated $13.2 trillion shortfall over the next 75 years. And since both solutions work, neither party has any incentive to back down or work with the opposition on a middle-ground fix. Without this cooperation, getting to 60 votes is going to be virtually impossible.
Trump is focused on the short term
To make the case even stronger that no reform is likely over the next two years, President Trump has regularly avoided any opportunity to directly amend the Social Security program.
Rather than proposing direct solutions to resolve Social Security's numerous issues, Trump has long believed that stimulating the U.S. economy and bolstering GDP growth is the answer. Since the payroll tax is Social Security's primary income source, the thesis here is that a faster-growing economy with strong wage growth should lead to an uptick in payroll tax collection that offsets the demographic shifts working against the program. While Trump may very well be right in the short term, it's almost certain this thesis will prove wrong over the long run, since recessions and economic contractions are inevitable.
The key point here being that even if Congress were to somehow find a way to reach the necessary 60 votes in the Senate to amend Social Security, there's virtually no chance that Trump would sign the bill into law. With an election of his own on tap in just over two years, and the belief that tackling Social Security reform is akin to political suicide, Trump would rather steer clear of the issue entirely.
Though a reshuffling of Capitol Hill might seem like a good time for Social Security reforms to spark, it's very unlikely.