Chances are that there's no escaping the chatter. If you're currently receiving a Social Security benefit or expect to receive one sometime in the future, whether that's a few years from now or even 50 years from now, you're probably well aware of Social Security's imminent cash problems.
According to the Social Security Board of Trustees, the program responsible for providing a monthly payout to 64 million people each month is set to expend more than it collects in 2020. This would be the first time this has happened since 1982. Worse yet, Social Security's nearly $2.9 trillion in asset reserves is expected to be gone by 2035, with an estimated $13.9 trillion funding gap awaiting between 2035 and 2093. While Social Security is in no danger of going bankrupt, there's a very real sense that an across-the-board benefit cut may be necessary in the coming years.
Clearly, the American public is looking for answers to strengthen Social Security, and President Trump believes he has that answer.
A smiling President Trump standing behind the presidential podium. Image source: Official White House Photo by Joyce N. Boghosian.
Trump's indirect Social Security worked wonders in 2018...
What's interesting about Donald Trump's approach to fixing Social Security is that he doesn't believe direct solutions are a smart idea. A direct solution would involve amendments to the Social Security program itself, such as a change in the tax structure or the full retirement age, as an example. Trump has long understood that direct changes to the program will mean that some group will wind up worse off than they were prior to the fix -- and this could translate into lost votes in an upcoming election.
Instead, the president has approached Social Security as if walking on eggshells. Rather than direct fixes, Trump's solution has involved strengthening the U.S. economy.
You see, Social Security's payroll tax accounts for the lion's share ($885 billion of the $1 trillion collected in 2018) of the revenue brought in each year. If Trump can find a way to incite economic growth and simultaneously boost wages, a larger amount of payroll tax should be collected, thereby strengthening the Social Security program. The president aimed to accomplish this by passing the Tax Cuts and Jobs Act (TCJA), which cut corporate and individual tax rates to encourage hiring and spending.
In 2018, Trump's indirect solution appears to have done the trick. The Trustees had called for a minor net-cash outflow from the program in 2018 in its annually released report. However, when the year came to a close, Social Security's asset reserves actually grew by more than $3 billion. Sure, this was the smallest net-cash surplus in over three decades, but it proved Social Security forecasters wrong and put a feather in Trump's cap.
President Trump giving remarks at the Pentagon. Image source: Official White House Photo by Tia Dufour.
... but it's just weeks from face-planting in 2019
Unfortunately, the president's indirect Social Security solution isn't faring nearly as well in 2019.
Every month, the Social Security Administration provides a snapshot of the combined investment holdings of its Old-Age and Survivors Insurance Trust and Disability Insurance Trust. These "investment holdings" are special-issue bonds and certificates of indebtedness that are required by law to be purchased with net-cash surpluses from the program. In other words, when discussing Social Security's "asset reserves," we're really talking about its aggregate net-cash surpluses since inception that are now invested in interest-bearing bonds.
When the year began, Social Security had $2.895 trillion in asset reserves. But as of the end of November 2019, the program's investment holdings had shrunk to $2.869 trillion. Put simply, through the first 11 months of 2019, $26 billion more has been spent from Social Security than the program has brought in. There is one more month to account for in 2019, but it's looking awfully likely that 2019, not 2020, will be the first year of net-cash outflows from Social Security since 1982.
What's important to realize here is that Americans shouldn't be surprised that Trump's indirect Social Security fix is on life support. No indirect fix is ever going to work for the long run, given that economic slowdowns and recessions are a natural part of the U.S. economic cycle.
Image source: Getty Images.
Now what?
To reiterate, the silver lining here for current and future retirees is that Social Security's solvency isn't in question. The program can continue paying out beneficiaries without so much as a nickel in asset reserves. However, the sustainability of the existing payout schedule is very much in question, with benefit cuts of up to 23% awaiting retired workers by 2035 if nothing is done to resolve these issues.
So, what now for America's most decorated social program?
We need Democrats and Republicans to compromise on a direct solution that strengthens Social Security over the long haul because a bipartisan solution is a more encompassing fix than either of the core proposals from Democrats or Republicans.
For example, Republicans want to cut long-term outlays by gradually increasing the full retirement age to as high as 70. This would require future generations of retirees, such as millennials, to wait longer to collect their full monthly payouts or accept a steeper monthly reduction if claiming early. No matter the choice, their lifetime benefits from the program would be reduced.
Comparatively, Democrats firmly believe that increasing revenue via taxation is the best way to improve Social Security's outlook. Democrats wish to accomplish this by increasing or eliminating the maximum taxable earnings cap associated with the payroll tax, thereby requiring the well-to-do to pay more into the system.
The problem is that both solutions are, by themselves, inherently flawed. The GOP's fix doesn't result in savings for many decades and thus fails to address the near-term cash shortfall, while the Democrats' plan isn't accounting for birth-rate changes or increased longevity. What one solution lacks, their opponents' fix addresses. This is why a direct, bipartisan solution is going to be so important to the future of the Social Security program.
