Social Security may very well be the nation's most pivotal social program, but it's also in some pretty deep trouble.
In early June, the Social Security Board of Trustees released its latest annual report on the state of the program. Suffice it to say, things aren't looking rosy for current or future beneficiaries. While there's virtually no chance of Social Security going bankrupt and disappearing, there is a growing possibility that a benefits cut may be needed to sustain payouts for future generations of workers.
Image source: Getty Images.
The latest report estimates that, beginning this year, the program will expend more than it generates in income. Although this net cash outflow will be minuscule compared to the $2.89 trillion in asset reserves that have been built up since the last major overhaul in 1983, it's still bad news. As demographic changes continue to impact Social Security, these net cash outflows will accelerate. By 2034, Social Security's asset reserves are expected to be completely exhausted. Should this excess cash disappear, the Trustees have forecast the need for a benefits cut of up to 21% to sustain payouts over the long term (defined as the next 75 years).
This prediction of an imminent cash shortfall and the need to cut benefits has left the American public wondering when Congress will act.
Trump's indirect approach to resolving Social Security's crisis
However, not everyone in Washington believes direct action to resolve Social Security's problems is necessary. President Trump has long believed that indirect action is best-suited to resolve the estimated $13.2 trillion cash shortfall the program is facing over the next 75 years. In fact, Trump has gone so far as to imply that amending the program directly could be political suicide. That's because no matter how the levers are pulled, a Social Security fix would mean that some group of folks will lose.
Image source: Getty Images.
The president has instead chosen to focus on growing the U.S. economy as a means of buoying the Social Security program.
You see, Social Security has three forms of funding:
- A 12.4% payroll tax on earned income up to $128,400
- Interest income from its asset reserves
- The taxation of Social Security benefits above select earning thresholds
The payroll tax on earned income provided about 87% of the nearly $1 trillion collected by the program last year. Therefore, if Trump and his allies in Congress can introduce legislation that spurs economic growth, thereby increasing the number of employed workers as well as their wages, it could increase payroll tax revenue above and beyond the Trustees' growth projections, presumably leading to a net cash surplus rather than an outflow. This is one of the many reasons the Tax Cuts and Jobs Act was introduced and passed in December.
Trump notches another victory
The Tax Cuts and Jobs Act is primarily designed to lower corporate income tax rates to spur economic expansion and hiring, as well as reduce individual income tax rates to give consumers more disposable income. Since the U.S. economy relies on consumption for about 70% of GDP, it's a key cog to economic growth.
Image source: Official White House Photo by Shealah Craighead.
At the end of August, U.S. GDP growth for the second quarter was adjusted higher to an estimated 4.2%, the fastest pace of economic growth since 2014. This growth rate was coupled with a fourth consecutive month of the U.S. unemployment rate being below 4%. Low unemployment and above-average GDP growth would suggest a robust economy whereby payroll tax collection should come in ahead of projections.
But things just keep getting better for Trump, at least as it relates to his indirect fix for Social Security. The Labor Department's Job Openings and Labor Turnover Survey (JOLTS) released earlier this month showed something incredible: a record number of seasonally adjusted job openings (6.9 million, as of July), at least since JOLTS measurements began in December 2000. Compared to the 6.2 million people who found themselves out of work in August, it means there are actually more job openings than there are unemployed persons. That's a recipe for a tightening labor market, especially for skilled workers, and it usually translates into wage inflation.
In other words, workers have more power to dictate higher salaries and raises than they've had in a really long time. If workers receive healthy wage increases (and they should, based on this data), then payroll tax collection for Social Security should see a notable increase.
The president's short-sighted view is a concern
Though this is a clear feather in the cap for Donald Trump, it's not a sustainable long-term solution to the program's cash shortfall.
Image source: Getty Images.
The problem with indirectly attempting to fix Social Security is that there's absolutely no way to prevent the economy from contracting or dipping into a recession. No matter what the federal government does with fiscal policy, or the Federal Reserve with monetary policy, there is no concrete formula to keep the U.S. economy out of a recession. In order for payroll tax revenue to offset changing demographics, such as the retirement of baby boomers and increased longevity, we'd probably have to see above-average GDP growth for decades; and history shows that's just not possible. When, not if, the next recession strikes, it's going to toss Trump's thesis about economic growth saving Social Security out the window.
If Social Security is going to be fixed for current and future retired workers, it's going to need direct intervention and amendments from Congress. Yes, this means some group of people is going to lose. If Democrats have their way, it means the wealthy will have to pay more into the program without an extra cent in benefits during retirement. Or, if Republicans get their core proposal signed into law, it could mean reduced lifetime payouts for future generations of retirees. No one said the decision would be easy -- but it needs to be made if Social Security is to continue being a financial foundation for tens of millions of aged Americans.
