1 Social Security Reform Democrats and Republicans Can Actually Agree On

Despite the parties being at opposite ends of the spectrum, one Social Security solution has appeal for both.

Sean Williams
Sean Williams
Jul 6, 2019 at 6:06AM
Investment Planning

With the initial Democratic presidential debate now in the books, it's official: We've entered election season. Although the American public will be eager to hear the candidates discuss countless topics in the months that lie ahead, perhaps one of the most hot-button issues, which hasn't been touched on yet in early debates, is Social Security.

Social Security's longevity is a hot-button topic

According to the newest annual report from the Social Security Board of Trustees, America's most important social program is facing a big change in 2020. Beginning next year, the program will expend more money than it collects, which is the first time that's happened since 1982. And things are only slated to get worse, with this net-cash outflow growing with each passing year. By the time 2035 rolls around, the nearly $2.9 trillion in asset reserves the program had built up since its inception will be completely exhausted.

A person tightly gripping their Social Security card between their thumb and index finger.

Image source: Getty Images.

What does that mean, exactly? Well, on the bright side, it does not mean bankruptcy, insolvency, or you not getting a payout when you retire. As long as you qualify for a retired worker benefit, you'll still be receiving a payout from Social Security, whether that's 20 years from now or 50 years from now. The program's recurring sources of revenue (i.e., its 12.4% payroll tax and the taxation of Social Security benefits for select seniors) ensure that the program cannot go bankrupt.

The downside is that Social Security's net-cash outflow signifies the unsustainability of the existing payout schedule, inclusive of annual cost-of-living adjustments. According to the Trustees, there's an estimated $13.9 trillion shortfall between 2035 and 2093, based on the current payout schedule. The only way to rectify this is to raise additional revenue, cut expenditures, or implement some combination of these two; otherwise, across-the-board cuts of up to 23% may be headed retired workers' way by 2035.

In short, the program that currently provides more than 3 out of 5 retired workers with at least half of their monthly income could pass along a pretty big benefit cut if lawmakers don't work to solve the problem.

Here's where things get messy.

A Democrat donkey and Republican elephant squaring off atop the American flag.

Image source: Getty Images.

Democrats and Republicans approach Social Security reform from opposite ends

Solutions to "fix" Social Security and put the program on better footing abound on Capitol Hill. A lack of ideas is certainly not the problem. The issue is that while real solutions exist, the votes needed to turn these solutions/bills into legal amendments to the Social Security Act aren't there -- and that's because neither the Democratic nor the Republican Party will cede an inch and find common ground with their opposition.

Each party has one solution that's at the core of its version of Social Security reform.

For Democrats, it's the idea of raising the payroll tax earnings cap from its current level of $132,900 in 2019. In layman's terms, all earned income (e.g., wages and salary but not investment income) between $0.01 and $132,900 is subject to Social Security's payroll tax, while earned income above this level is exempt. Between 1983 and 2016, the amount of earnings escaping the payroll tax essentially quadrupled from a little over $300 billion to about $1.2 trillion. Democrats want to end this loophole that allows the wealthy to escape taxation on some of their earned income by raising or eliminating the payroll tax cap.

Meanwhile, Republicans prefer the idea of reducing long-term program outlays so as to put Social Security on better footing. The GOP would do this by gradually raising the full retirement age from its current peak of age 67 in 2022 for those folks born in 1960 or later to perhaps as high as age 70. In doing so, current and near-term retirees would have their lifetime benefits protected, but future generations of retirees would either have to wait longer to collect 100% of their monthly payout or accept a steeper permanent reduction to their benefit by claiming early. Either way, the idea is to reduce long-term program outlays.

In general, Democrats won't support any measure that reduces Social Security benefits, while Republicans oppose any increase in taxation, leaving the issue at a dangerous impasse.

President Trump signing legislation while in the Oval Office.

President Trump signing legislation while in the Oval Office. Official White House Photo by Shealah Craighead.

Baby steps: One reform that the GOP and Democrats could agree on

However, there is one middle-ground reform that influential lawmakers on both sides of the aisle have offered support for: means testing.

Means testing is the idea of paying out benefits to those who need them most then partially reducing or even eliminating payouts for those folks and couples who are earning quite a bit of money. Means testing isn't going to increase the revenue Social Security is bringing in each year, but it would reduce program outlays, since wealthier individuals and couples would only qualify for a reduced benefit or perhaps no benefit at all.

While on the campaign trail in 2016, President Trump tossed around the idea of instituting means testing as a way of reducing program expenditures. In using himself as an example, Trump implied that the rich don't need their Social Security income to make ends meet and should therefore forgo their benefit.

During the same presidential campaign in 2015, Republican candidate Chris Christie, the former governor of New Jersey, suggested means testing as a solution. Christie's plan would have begun reducing benefits once a person's adjusted gross income (AGI) hit $80,000 then eliminated those benefits entirely for folks earning more than $200,000 in AGI per year.

Former Vice President Joe Biden listening to then-President Barack Obama in a meeting.

Former Vice President Joe Biden listening to then-President Barack Obama in a meeting. Official White House Photo by Pete Souza.

Current Democratic presidential front-runner Joe Biden has also come out in favor of means testing as a solution to strengthen Social Security. While speaking at a Brookings event in May 2018, Biden had this to say:

Paul Ryan [former Republican Speaker of the House] was correct when he did the tax code. What's the first thing he decided to go after? Social Security and Medicare. Now, we need to do something about Social Security and Medicare. That's the only way you can find room to pay for it. I don't know a whole lot of people in the top one-tenth of 1% or top 1% [who] are relying on Social Security when they retire.

Means testing would reduce program outlays, which is a core focus of the GOP, and it specifically targets wealthier beneficiaries who are less likely to need that income, which Democrats should favor.

The only downside here is that it's a baby step. Although means testing would help Social Security adjust its course from the path it's on now, it's unlikely that it would go far enough to cover the estimated $13.9 trillion cash shortfall between 2035 and 2093. Nevertheless, means testing could provide the initial spark that leads to future bipartisan amendments to strengthen America's top social program.