There's arguably no social program in this country that's more important, or gets more attention, than Social Security. The reason is simple: it keeps more than 22 million people a month out of poverty, including almost 15.1 million seniors, according to an analysis from the Center on Budget and Policy Priorities.
Yet this all-important program has no shortage of issues, as highlighted by the latest Social Security Board of Trustees report, released in early June. That report called for 2018 to mark the first time in 36 years that the Social Security program expends more than it collects in revenue. Though we're only talking about a $1.7 billion net cash outflow, a number of ongoing demographic changes are expected to balloon this annual outflow figure in the years to come. By 2034, the entirety of the program's $2.89 trillion in asset reserves could be gone, at which point an across-the-board benefits cut of up to 21% may await.
Democrats and the GOP are polar opposites when it comes to fixing Social Security
Now, the question you're probably asking yourself is this: "Why the heck isn't Congress doing anything about Social Security's issues?" And the answer is also simple: Democrats and Republicans can't agree on much when it comes to fixing Social Security.
Democrats have long favored raising additional revenue for the program by raising or eliminating the cap associated with the payroll tax (currently $128,400). The Social Security Administration found that $1.2 trillion in earnings escaped the payroll tax in 2016 because the well-to-do had earned income above the maximum cap. Democrats believe that raising or eliminating this cap, and requiring the wealthy to pay more, will resolve the program's problems.
Meanwhile, Republicans have often approached a fix by suggesting an increase in the full retirement age -- i.e., the age at which you become eligible to receive 100% of your retirement benefit. Since longevity has increased at a much faster pace than the full retirement age, increasing the full retirement age would coerce workers to wait longer to receive their full payout, or to accept a steeper permanent reduction if claiming early. In easy-to-understand terms, it would reduce long-term expenditures by cutting lifetime payouts.
To be clear, both of these fixes work to resolve Social Security's cash shortfall between 2034 and 2092, albeit they achieve their goal from opposite ends of the spectrum.
Democrats and Republicans do agree on a few things
However, for as polar opposites as Democrats and Republicans are when it comes to fixing Social Security, these two parties can actually agree on three things.
1. Social Security is in trouble
The first relatively undisputed fact that both parties agree on is that Social Security is in trouble over the long run. Per the Trustees report, it's facing a $13.2 trillion cash shortfall between 2034 and 2092, based on the current payout schedule.
Though there are a few outliers in the belief that Social Security is in trouble (e.g., President Trump and his economic advisor Larry Kudlow believe strong growth will fix Social Security), both Democrats and Republicans as a whole are well aware of the need to fix the program for current and future generations. The reason they haven't, other than being unable to agree on a specific solution, is because they both fear losing their elected seats by enacting a fix.
You see, no matter what solution is implemented, some group of folks loses out. If the Democrats increase the maximum taxable earnings cap, then the wealthy pay more without seeing an added dime in benefits. If Republicans raise the full retirement age, then future generations of retirees see their lifetime benefit potential reduced. No matter the solution, someone loses. And if someone loses, then that group of people could vote out the political party that passed the fix.
2. The primary funding mechanisms for Social Security should remain intact
Americans can collectively breathe a sigh of relief in knowing that neither Democrats nor Republicans have any intention of changing how the Social Security program generates income. That means less uncertainty about the future.
Social Security is currently funded three ways:
- Payroll tax: The 12.4% payroll tax on earned income is by far the program's workhorse, supplying it with $873.6 billion of the $996.6 billion in revenue collected last year.
- Interest income: Social Security's $2.89 trillion in excess cash is required by law to be invested in special-issue bonds and, to a lesser extent, certificates of indebtedness. The average yield on these assets is about 2.9%, and it led to $85.1 billion in interest being generated for the program in 2017.
- Taxation of benefits: Passed in 1983 and introduced in 1984, the taxation of benefits becomes applicable when adjusted gross income, plus one-half of benefits, exceeds $25,000 for an individual or $32,000 for a couple filing jointly. The taxation of benefits led to $37.9 billion being collected last year.
In 2017, a GOP lobbyist tossed around the idea of eliminating the payroll tax and replacing it with a value-added tax on consumption. The idea didn't get anywhere near the legislative floor, confirming Republicans' and Democrats' steadfastness in leaving these funding mechanisms as is.
3. The program's COLA measure is flawed
Perhaps the most public agreement you'll ever see from Democrats and Republicans pertaining to Social Security is their mutual dislike for the cost-of-living adjustment (COLA) measure, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Think of COLA as nothing more than the "raise" that beneficiaries receive most years that's determined by the inflation they're facing. This inflation is calculated by the CPI-W. The thing is, the CPI-W is a measure that's tied to the spending habits of predominantly working-age urban and clerical workers who probably spend their money very differently from seniors. Mind you, seniors make up a majority of the program's beneficiaries. In short, the inflationary tether being used is keeping tabs on the wrong group of people, resulting in a precipitous loss of purchase power for seniors.
Although both parties want to see Social Security's COLA changed, they (surprise!) can't figure out the best way to do it.
Democrats have proposed implementing the Consumer Price Index for the Elderly, or CPI-E. As the name suggests, it'd measure the spending habits of households with persons aged 62 and older, and therefore offer a more accurate (but still imperfect) measure of the inflation seniors are facing. It would likely result in a higher annual COLA, more years than not.
Republicans prefer the Chained CPI, which is the inflationary tether now being used with federal income tax brackets and credits following the passage of the Tax Cuts and Jobs Act in December. The Chained CPI takes into account substitution bias, or the act of trading down to a similar, cheaper item if one grows too pricy (e.g., buying pork or chicken instead of beef). If the Chained CPI were used, chances are that COLAs would be even lower than they are under the CPI-W.
The big question going forward is: Can these parties agree on anything to improve the program's long-term outlook? Only time will give us that answer.