Social Security, our nation's most important social program, is on the verge of a big change -- and it's one that most Americans aren't looking forward to.
Last June, the Social Security Board of Trustees released its newest annual report detailing the short-term (10-year) and long-term (75-year) outlook for the program. This report, which has been published for decades, has been warning of a cash shortfall over the long run since 1985, which is just two years after Congress passed the last major overhaul of Social Security.
The 2018 findings, much like previous reports, spoke of trouble ahead. However, the immediacy of that trouble was magnified last year.
Social Security was expected to hit an unwanted inflection point in 2018
A combination of ongoing demographic changes that include the retirement of baby boomers, increased longevity, growing income inequality, and reduced fertility rates, along with policies that are or were expected to be implemented by the Trump administration (e.g., a reduced level of legal immigration), were forecast to make Social Security's situation a bit more precarious in the short term.
More specifically, the Trustees forecast that the program would expend more than it collects in revenue in 2018 for the first time since 1982. The previous projection in 2017 had called for this inflection point to hit in 2022. This estimated net cash outflow of $1.7 billion is relatively small compared to Social Security's nearly $2.9 trillion in asset reserves, but it nevertheless solidified the idea that the current payout schedule isn't sustainable.
Assuming the Trustees' forecast is correct, the program's $2.9 trillion in asset reserves will be eroded in the years to come by widening net cash outflows. By 2034, the program's asset reserves are projected to be completely gone, at which point an across-the-board benefits cut of 21% may be needed to sustain payouts through the year 2092. Given that more than 3 out 5 retired workers today rely on their Social Security payouts for at least half of their income, a benefit cut of up to 21% could be devastating.
But those worries can now wait just a bit longer.
President Trump "trumps" Social Security forecasters in 2018
President Trump, knowing full well the problems that Social Security is facing, has been steadfast in his belief that direct changes to the program are off limits. Of course, the primary reason the president feels this way is because any direct changes to Social Security will result in some group of people losing out, which won't bode well on the political party that passed such legislation.
Rather, Trump has favored the indirect approach of fixing Social Security. This involves boosting U.S. economic growth such that more payroll tax revenue is collected. Social Security's 12.4% payroll tax on earned income was responsible for more than 87% of the $996.6 billion collected in 2017. If the president could pass policies that would encourage GDP growth, boost employment, and coerce consumers to spend, it could provide enough of a boost to collected revenue to push Social Security's unwanted inflection point further down the road.
It appears as if the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 may have done just that.
The TCJA permanently reduced the peak corporate marginal tax rate from 35% to 21% and lowered the expected federal tax liability for most American taxpayers through Dec. 31, 2025, which is when the individual portion of the tax cuts will sunset. Although a lot of this extra income for publicly traded companies was used to repurchase stock or boost dividends, some appears to have been used for hiring and wage expansion. Combined with robust consumer spending, the table was set for higher payroll tax collection.
With new data released from the Social Security Administration this month, we now know that President Trump was able to prove Social Security's forecasters wrong, at least in the very short term.
Here's a snapshot of Social Security's investment holdings -- the program is required by law to invest its net cash surpluses each year into special-issue bonds and certificates of indebtedness -- from the end of 2017:
And now, here's a look at the program's investment holdings at the end of 2018:
The figure you'll want to concentrate on is the total amounted invested, as it describes the Trust's aggregate net cash surpluses. At the end of 2017, the combined Old-Age and Survivors Trust and Disability Trust (this combination is often referred to as "OASDI") had $2,891,991,968,000 invested. By the end of 2018, this figure had risen to $2,895,174,945,000, an increase of $3,182,977,000. Mind you, a nearly $3.2 billion net cash surplus in Social Security is the lowest it's seen since 1983, but it nevertheless isn't a reduction, as forecast by the Trustees.
Trump's indirect approach isn't a long-term solution
While President Trump clearly has something to gloat about, it's also important to recognize that no amount of fiscal stimulus is going to resolve Social Security's projected $13.2 trillion cash shortfall over the long run. For that to happen, direct changes to the program will be needed.
Though the TCJA has seemingly provided a lift to GDP growth rates in 2018, the economy is naturally cyclical. This means economic contractions and recessions are an expected recourse at some point in the future. And when a recession does rear its head, the economic expansion that Trump had counted on to drive payroll tax collection will fall flat. Trump's indirect solution may work again in 2019 and over the short term, but it's not a long-term fix by any means.
If Social Security is going to be fixed, it's going to take bipartisan cooperation and a combination of core ideas from both political parties.
For example, Democrats have proposed increasing or eliminating the maximum taxable earnings cap, which is $132,900 in 2019, thereby exposing previously exempted earned income above this cap to taxation. This additional revenue should help ebb or erase the estimated long-term cash shortfall.
Meanwhile, Republicans would prefer to see the full retirement age -- the age at which you become eligible to receive your full payout, as determined by your birth year -- gradually increased from a peak of 67 to perhaps as high as age 70. Doing so would require future generations of workers to wait longer to receive their full payouts or to accept a steeper permanent reduction if claiming early. Either way, it would help reduce long-term expenditures as it combats increased longevity.
Each solution works to fix Social Security, and each tackles something their opposition's proposal lacks. A direct solution is the only way Social Security is going to find itself on better financial footing, and we can only hope that President Trump comes to that realization sooner rather than later.
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