Among the various social programs in our country, none bears more importance than Social Security. It keeps an estimated 22 million people out of poverty each and every month (that's more than a third of the program's current beneficiaries), and provides at least half of the monthly income for more than three out of five retired workers. America's retired workers would be in some serious financial trouble without Social Security.
Unfortunately, this treasured program is in some deep trouble of its own. The annually released Social Security Board of Trustees report claims that the program is facing a $13.9 trillion cash shortfall between 2035 and 2093, with Social Security's $2.9 trillion in asset reserves expected to be exhausted by 2035. If Congress fails to act by raising additional revenue and/or reducing expenditures, it's believed that across-the-board benefit cuts of up to 23% could await retired workers.
As you might imagine, a 23% pay cut would be devastating for those folks who can no longer generate income on their own. Thus, it's in lawmakers' hands to fix this imminent Social Security crisis, and voters will be looking for the 2020 presidential candidates to provide solutions. The question is: Do we raise revenue, cut benefits, or do both?
If you were to poll the American public, a majority of folks stand behind the idea of increasing revenue via added taxation rather than cutting benefits. But if you look back at the Social Security proposals of the two 2020 presidential front-runners -- Republican incumbent Donald Trump and Democratic hopeful and former Vice President Joe Biden -- you'll see that both have previously called for outlay reductions to the Social Security program.
Trump sides with core GOP ideology
For his part, President Trump has approached Social Security as if walking on eggshells. That's because he believes any direct solutions to Social Security would eventually come back to haunt the Republican Party and cost votes in an upcoming election. But no matter what solution is implemented, be it adding revenue or reducing outlays, some folks are going to be worse off than before. In other words, there's always going to be a loser.
During his first term as president, Trump has instead chosen to tackle Social Security's perceived shortcomings with indirect tactics. Namely, he's trying to boost economic growth, which should increase the amount of payroll tax revenue being collected by the program. As a reminder, the 12.4% payroll tax on earned income was responsible for more than 88% of $1 trillion in revenue collected by Social Security in 2018. Although the passage of the Tax Cuts and Jobs Act does appear to have provided an economic boost in 2018, indirect approaches to fixing Social Security won't have long-term legs.
Rather, Trump might choose to side with Republican ideology if reelected, which is to reduce long-term expenditures by gradually raising the full retirement age -- i.e., the age at which you become eligible for 100% of your monthly payout, as determined by your birth year -- and/or switching the program's inflationary tether to the chained CPI.
While on the campaign trail prior to his 2016 election Trump said that means-testing might be an interesting solution. With means-testing, benefits would be reduced or stopped completely depending on a retiree's or couple's earnings. It would effectively ensure that well-to-do retirees who don't need Social Security income aren't receiving it.
Trump's presidential budget proposals have also alluded to Social Security cuts, though presidential budget proposals are often more of a talking point than concrete legislation. In March, while presenting his fiscal 2020 federal budget proposal, Trump called for $26 billion in Social Security outlay reductions over the next decade. Even though this is a drop in the bucket compared to the likely $13 trillion to $14 trillion that'll be disbursed by Social Security over the next 10 years, it's still a clear indication that the president would like to reduce spending, if possible.
Surprise! Joe Biden has called for Social Security to be cut three times
Maybe the bigger surprise here is that the leading Democratic presidential candidate (for now) has also previously called for cuts to the Social Security program.
Back in 2007, while running as a candidate for the 2008 Democratic ticket, which Barack Obama eventually won, Joe Biden noted that his plan was to work on a bipartisan solution to fix Social Security's funding shortfall. This included increasing the earnings cap associated with the payroll tax in order to boost revenue, as well as weighing options such as a gradual increase to the full retirement age. Raising the full retirement age would require future generations of workers (millennials and Generation Z) to wait longer to collect their full monthly payout or accept a steeper monthly reduction by claiming early. No matter the choice, it would reduce lifetime outlays from Social Security, thereby saving the program money.
Joe Biden also played a key role in orchestrating the payroll tax holiday in the early part of this decade that reduced payroll tax revenue over two years by about $112 billion. Then-president Obama leaned on his VP to work with congressional Democrats and Republicans to get the U.S. economy back on track. The two sides wound up extending the George W. Bush-era tax cuts and lowered payroll tax rates by 2 percentage points for a period of two years.
Even as recently as May 2018, Biden, while speaking at a Brookings event, suggested in passing that means-testing might not be a bad idea.
The point is that Biden would be expected to adhere to the Democrats' core ideology, which involves raising additional revenue for Social Security and not cutting benefits. Yet, over the past 12 years, the current Democratic front-runner has called for or helped with Social Security cuts on three separate occasions.
The hard truth: Some form of benefit cuts are probably needed
Although no current or future retirees want to see Social Security benefits reduced, the fact is that some form of bipartisan solution is needed to make Social Security stronger.
The reason? Each party brings something to the table that their opposition lacks.
For instance, Republicans have been touting the idea of gradually raising the full retirement age for years in order to reduce program expenditures. Unfortunately, the GOP's plan doesn't result in significant savings for decades to come, which doesn't exactly help Social Security's asset reserve depletion timeline, which is roughly 15 years away. The Democrats' plan, which raises additional revenue by increasing taxation on the well-to-do, or all workers, would provide an immediate lift in program income and help to stave off the depletion of Social Security's asset reserves.
Meanwhile, the Democrats' plan ignores or minimizes the impact of persistently declining birth rates and the fact that average Americans' life expectancy at birth has gone up by more than 16 years since Social Security was signed into law in 1935. This compares to the full retirement age, which hasn't even risen two years since payouts began in 1940. Translation: A program that was designed to be a financial foundation for years is now being leaned on for 20 or more years in some instances, and it's straining the system. Gradually raising the full retirement age, as the GOP has called for, helps balance out this issue.
Suffice it to say that voters would be wise to pay close attention to what these candidates have to say about Social Security in the months ahead.