Few if any programs shoulder the importance, or burden, that Social Security does. Aside from providing disability insurance and survivor's protection to tens of millions of working Americans, it also divvies out a monthly benefit to over 62 million people each month, 43.4 million of whom are retired workers aged 62 and over. More than 3 out of 5 of these aged beneficiaries are reliant on their monthly checks to account for at least half of their income.
This last point is what makes this next fact so worrisome: Social Security is also in some deep trouble.
The latest annual report from the Board of Trustees predicts that Social Security will expend more than it generates in income this year for the first time since 1982. And this isn't just a one-off change. Beginning in 2020, and for each subsequent year, the program's net cash outflow is expected to increase. By 2034, the nearly $2.9 trillion in asset reserves currently held by the Trust is projected to be gone, paving the way for what could be a substantial cut to benefits.
President Trump's indirect approach to strengthen Social Security
Clearly, something needs to be done to fix Social Security, and President Donald Trump believes he has the answer. Generally sidestepping Social Security during his presidential campaign in 2016, Trump has long-favored indirectly resolving the program's long-term (75-year) cash shortfall.
In plainer terms, Trump doesn't want to change anything about how the program is currently set up. Rather, he wants to adjust fiscal policy, which would aim to grow the economy at a faster pace. The purpose of increasing the U.S. GDP growth rate is twofold.
First, by increasing GDP growth, there would presumably be more workers in the labor force, ergo more payroll tax revenue to be collected. In 2017, payroll tax revenue accounted for more than 87% of the $996.6 billion collected by Social Security.
The second reason, which is somewhat similar to the first, is that a faster-growing economy and a low unemployment rate should lead to wage growth. Higher wages should equate to existing workers paying more into the Social Security program via the payroll tax.
Or, to summarize things neatly: Trump wants to boost payroll tax revenue collected by strengthening the U.S. economy. In September, Trump even commented that his party was "making Social Security stronger."
Are Trump's policies actually hurting Social Security?
But is this actually the case? Has the passage of the Tax Cuts and Jobs Act, along with other Republican policies, made Social Security stronger?
If we were to examine the very short term, then a case can certainly be made that the president is correct. Second-quarter GDP growth came in at 4.2%, the fastest growth rate since the third quarter of 2014. Meanwhile, the unemployment rate hit a nearly 49-year low of 3.7%, which should help lift wage inflation. All signs would appear to point to improved payroll tax collection in 2018, and perhaps even 2019.
However, things get considerably murkier beyond the near term. Over the long run, Trump's policies may be hurting, not helping, Social Security in a variety of ways.
1. It'll reduce revenue from the taxation of benefits
Social Security has two forms of recurring revenue: the aforementioned 12.4% payroll tax on earned income, and the taxation of benefits, which was signed into law in 1983 and implemented in 1984.
The taxation of benefits allows a portion of a Social Security recipient's payout to be subject to federal ordinary income tax rates, assuming they cross a certain earning threshold. If an individual's adjusted gross income (AGI) plus one-half of their benefit is $25,000 or higher ($32,000 for a married couple filing jointly), they'll be subject to paying tax on a portion of their payout. In 2017, the taxation of benefits brought in $37.9 billion. And while it's an oft-criticized tax that hasn't been adjusted for inflation since it was introduced, the annual income it generates is very much needed to support Social Security.
The flagship tax reform passed by the Republican-led Congress and signed into law by President Trump on Dec. 22, 2017 is expected to adversely impact the collection of tax revenue on benefits. That's because the Tax Cuts and Jobs Act adjusted both income levels and/or marginal tax rates for taxpayers, as well as nearly doubled the standard deduction. Ultimately, it means some folks are seeing lower AGIs, thereby exempting them from the taxation of benefits.
2. Anti-immigration policies may result in substantially less payroll tax collection
Another surprising way that Trump's policies may actually be weakening Social Security over the long haul is through his anti-immigration stance. Trump's insistence on building a wall between the U.S. and Mexico, ending the Deferred Action for Childhood Arrivals program (better known as DACA), and his previous support of cutting immigration to the U.S. in half over the next decade demonstrates his desire to reduce legal entrance by foreigners into this country.
The problem is, whether you realize it or not, Social Security is counting on a steady influx of immigrants to add much-needed payroll tax revenue to the program. Immigrants tend to be younger when they arrive in the U.S., meaning workers would likely contribute payroll tax revenue for decades before they'd be eligible for a retirement benefit.
Plus, immigrants on the path to citizenship would need to earn 40 lifetime work credits before they have the opportunity to collect a retirement benefit later in life. Undocumented immigrants aren't able to earn these credits, and therefore won't be able to receive a retirement benefit from Social Security. Nevertheless, undocumented workers still contributed $12 billion in payroll tax in 2010, according to AARP.
Less immigration would almost certainly mean less payroll tax revenue.
3. Rising federal deficits threaten Social Security's interest income
A final concern (and we're looking quite a ways out on this one) is what Trump's fiscal policy might do to the federal budget deficit and national debt levels.
As announced in mid-October, the federal government spent $779 billion more than it brought in during fiscal 2018 (the government's fiscal year runs Oct. 1 through Sept. 30). This represents a 17% increase from the previous year, and is the highest federal budget deficit we've seen since 2012. It also goes against commentary from President Trump who suggested that the Tax Cuts and Jobs Act would reduce, not increase, the federal deficit.
To be clear, the current national debt of more than $21 trillion actually isn't an issue for Social Security, assuming it exhausts its asset reserves by 2034, as the Trustees have projected. But if Congress does wind up passing reforms to preserve Social Security's excess cash, then rising national debt levels could very well become a problem. If the interest payments on federal debt become too burdensome, then the federal government could struggle to meet the interest payments on the bonds and certificates of indebtedness held by Social Security's Trust.
In other words, the positives that Trump has brought to Social Security in the very near term appear to be substantially outweighed by negatives over the long run.