This has been a big month for Social Security. Just last week, the Social Security Administration (SSA) announced the largest annual cost-of-living adjustment since 2012, with benefits slated to rise 2.8% beginning in January. Even though some folks won't see the entirety of this raise due to the hold-harmless clause, it nevertheless should represent a real increase in Social Security income for a majority of beneficiaries.

October is also a time when the SSA updates a number of important figures for the upcoming year, including the payroll-tax earnings cap, the maximum monthly payout, and retirement earnings test exemption amounts, to name a few.

A Social Security card up close, with the name and number blurred out.

Image source: Getty Images.

This top Republican is clear in wanting Social Security reforms

But this October also included another, somewhat worrisome, release: the federal annual deficit. A report from the White House budget office noted that the annual federal deficit increased by 17% to $779 billion in 2018 (the fiscal year for the federal government ends on Sept. 30), and it's on track to top $1 trillion by 2020. 

A smiling photo of Kentucky Senator Mitch McConnell.

Image source: Sen. Mitch McConnell's Senate web page.

The worry here is simple: The higher the federal budget deficit goes, the deeper in debt the U.S. goes. And the deeper in debt the U.S. goes, the higher the risk over the long term that the government won't be able to support social programs like Social Security, Medicare, and Medicaid. Mind you, Social Security is already in deep trouble, with its nearly $2.9 trillion in asset reserves expected to be depleted by 2034, and the program facing a $13.2 trillion cash shortfall between 2034 and 2092.

While opponents of the Trump administration have been quick to rail on the largest budget deficit since 2012, the widening gap between revenue and expenditures is also catching the attention of a prominent member of Trump's own party.

As reported by The Washington Post, Senate Majority Leader Mitch McConnell, a Kentucky Republican, is particularly critical of the widening deficit on Capitol Hill, and he's apparently placing some of the blame on entitlement programs like Social Security. In a recent interview with Bloomberg, McConnell said:

There's been a bipartisan reluctance to tackle entitlement changes because of the popularity of those programs. Hopefully at some point here, we'll get serious about this. We haven't been yet.

That "bipartisan reluctance" McConnell refers to relates to the fact that 1) Democrats and Republicans agree on very little when it comes to Social Security; and 2) no matter what solution is implemented, some group of folks will lose out. The fact that no long-term fix for Social Security can be reached without some group of people losing has encouraged both parties to keep their distance. 

Relax, your Social Security benefit is in no immediate danger

Now, before you squirrel away money under the mattress, understand that it's very unlikely McConnell is going to lead a charge to "cut Social Security." In fact, McConnell went on to say so in another recent interview.

President Trump arriving on the White House South lawn.

President Trump has vowed to protect Social Security and Medicare benefits. Image source: Official White House Photo by Andrea Hanks.

President Trump has also been adamant that direct adjustments to Social Security and Medicare are off the table while he's in office. Trump has preferred addressing the looming Social Security crisis through tax reform. By reducing corporate and personal income-tax rates, Trump aims to boost the U.S. economy and increase payroll-tax revenue collection. In other words, there's virtually no chance that McConnell is going to get his wish for Social Security reform.

However, McConnell's commentary does put a very real dilemma into the forefront. Namely, that Social Security is in trouble, and even if the solution isn't popular, things need to be done to preserve it for current and future beneficiaries. The problem, as noted, is that Republicans and Democrats are approaching respective solutions from completely different ends of the spectrum.

Two very different approaches to the same problem

Republicans, like McConnell, would prefer to erase the long-term (75-year) cash shortfall by reducing program expenditures. This can be done one of two ways. First, the GOP would prefer to switch the current measure of inflation to the Chained Consumer Price Index. This index takes into account the behavior known as substitution bias, in which consumers will trade down to cheaper but similar goods or services if prices rise. The Chained CPI would result in lower annual cost-of-living adjustments for beneficiaries.

Even more so, Republicans prefer to raise the full retirement age, or the age at which you become eligible for your full retirement benefit, as determined by your birth year. It's currently set to peak at age 67 in 2022, but the GOP would like to see this gradually raised to as high as 70. Requiring workers to wait longer to receive their full payout, or to accept a steeper monthly reduction if claiming early, would reduce lifetime payouts, thereby resolving the shortfall. Of course, it would also hurt future generations of workers while protecting current retirees.

A blue Democrat donkey and red Republican elephant butting heads.

Image source: Getty Images.

Then there's the Democrats' proposal, which revolves around increasing revenue. Democrats want to increase or remove the maximum taxable earnings cap associated with Social Security's 12.4% payroll tax. In 2018, all earned income up to $128,400 is subject to the tax, while the fewer than 1 in 10 workers earning more than this are exempted on any income above this amount. Though it's a small percentage of workers, some $1.2 trillion in earnings escaped the payroll tax in 2016, according to SSA data. By taxing this income, Democrats should be able to completely erase the estimated $13.2 trillion long-term shortfall.

In this scenario, the wealthy would lose out since they'd have to pay more into the program, yet they wouldn't see an extra cent in Social Security benefits when they retire.

McConnell does make a few valid points, whether you agree with him or not. The program does need reform, the eventual solution probably won't be popular -- and most important, the solution does need to be bipartisan to work over the long run.

The question is: How long do we have to wait before the rest of Congress realizes this?

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