As you may have heard, Social Security, the nation's most storied social program, is in a bit of a bind. Despite the fact that Social Security can't go bankrupt (which is a testament to how the program generates income), the 2019 report from the Social Security Board of Trustees estimates that the program is facing a $13.9 trillion cash shortfall between 2035 and 2093. If nothing is done to correct this widening funding gap, then-current retirees and future generations of retired workers can expect a reduction to their payouts of up to 23%.
The Trustees report, which is published annually, has been warning Congress since 1985 that long-term (75-year) revenue generation would be insufficient to cover costs, yet lawmakers haven't made any significant strides to overhaul the program. But according to recent commentary from President Trump, this could change if he's elected to a second term in the Oval Office.
For years, Trump has leaned on the economy to strengthen Social Security
Since taking office three years ago, President Trump has primarily relied on indirect factors to influence Social Security and strengthen the program. Here's what Trump had to say at the Conservative Political Action Conference (CPAC) in March 2013, less than four years before winning the presidential election:
As Republicans, if you think you are going to change very substantially for the worse Medicare, Medicaid, and Social Security in any substantial way, and at the same time you think you are going to win elections, it just really is not going to happen ... What we have to do and the way we solve our problems is to build a great economy.
This is to say that Trump doesn't believe direct solutions are a smart move for politicians, given that any direct changes to the program will result in some group of people ending up worse off than they were before. These people could wind up voting elected officials out of office.
Instead of actively angling to change the Social Security program, the president has pushed for measures that he believes will lift U.S. economic growth. The passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 is a perfect example of this. Since Social Security's 12.4% payroll tax on earned income provides the bulk of revenue for the program ($885 billion out of $1 trillion collected in 2018), a stronger economy should lead to more payroll tax being collected.
For the past two years, the TCJA appears to have provided the U.S. economy with a modest boost, although it's important to realize that indirect solutions are not a long-term answer to Social Security's fundamental flaws. That's what has President Trump considering the possibility of real Social Security reform.
Here's what Trump said that has Social Security beneficiaries worried
Last week, at the World Economic Forum in Davos, Switzerland, President Trump was interviewed by CNBC Squawk Box host Joe Kernen, with the two discussing everything from interest rates to the economy over a 20-minute span (link opens YouTube video of the interview). Toward the end of the interview (17:53 mark in the video, for those curious), Kernen got in one last question about "entitlements," which includes such programs as Social Security and Medicare.
Kernen asked the president, "One last question: Entitlements ever be on your plate?"
To which Trump replied, "At some point they will be."
These six words have completely shaken Social Security beneficiaries to the core, especially considering that Trump has been adamant about avoiding direct solutions since his presidential campaign began in 2015. The reason? Existing and future beneficiaries fear benefit reductions.
To be crystal clear, at no point in President Trump's response did he state or imply that he or his administration would be looking to cut benefits for current retirees or future generations of retirees. Instead, Trump pivoted the discussion (on multiple occasions) to the expectation that U.S. economic growth is expected to pick up in a big way during the second half of 2020.
However, just because Trump didn't directly say his administration would look to reduce Social Security's outlays, doesn't mean the evidence isn't there.
If reelected, Trump is likely to push for direct Social Security reforms
Should Trump win a second term, there are three factors to suggest he would look to reduce Social Security's expenditures (i.e., reduce lifetime benefits paid by the program).
First, there's the core proposal of the Republican Party to fix Social Security, which Trump would be likely to support. Whereas Democrats favor raising additional revenue by increasing taxation on well-to-do workers, members of the GOP believe that gradually increasing the full retirement age to as high as age 70 would be the best move. The full retirement age is the age at which you become eligible for 100% of your monthly payout, as determined by your birth year.
If the full retirement age were to increase from its peak of age 67 in 2022 to say 70, it would require future generations of retirees to either wait longer to receive their full payout or to accept a steeper monthly reduction by claiming early. No matter their choice, the program's long-term outlays would be reduced, and future generations of workers would receive lower lifetime benefits.
Second, Trump's presidential budget proposals have previously called for cuts to the Social Security program. In March, the president's federal budget proposal called for a $26 billion cut (in aggregate) to Social Security between 2020 and 2029. A good portion of this reduction was to come from the Social Security Disability program, with a proposed adjustment that would reduce retroactive pay to six months from the current 12 months. If adopted, this would reduce program outlays by an estimated $10 billion by 2029.
Third and finally, Mick Mulvaney, the director of the Office of Management and Budget, has not been shy about his plans to coerce the president to make tough decisions. Mulvaney is a fiscal hard-liner, and he strongly believes that entitlement reform, perhaps including cuts, should be on the table. Mulvaney is one of the president's top advisors, and his influence could be paramount if Trump wins reelection.
Three important things to remember
While I don't believe there's any doubt that Trump's tendency would be toward reducing long-term outlays when it comes to Social Security, there are a number of other factors that current and future beneficiaries need to consider.
For one, we can't count our chickens before they've hatched. The election is still nine months away, and Trump stated at CPAC in 2013 that it's akin to political suicide to directly go after Social Security while trying to win an election. Trump would first have to win the 2020 presidential election for any of the above context to have any meaning. In short, don't get too far ahead when discussing the ramifications of what Trump said this past week while in Davos.
Secondly, even if Trump wins reelection and chooses to tackle Social Security reform, he'll find the sledding difficult if Democrats maintain control of the House and/or if Republicans don't gain significant ground in the Senate. Trump will not be able to unilaterally implement changes to the Social Security program, which should give certain beneficiaries a sigh of relief. The fact is that a polarized Congress (at least on party lines) makes Social Security reform highly unlikely in the near term.
Lastly -- and I know this is going to sound crazy -- the long-term cuts that beneficiaries fear are very much part of the puzzle to fixing Social Security. The addition of new revenue through taxation, as proposed by Democrats, would help solve a lot of Social Security's near-term funding concerns, while the GOP's proposals would aid in reducing long-term outlays and counteracting increased life longevity and lower birth rates. In effect, Democrats and Republicans may dislike what their opposition has to offer, but both are very much needed to make Social Security a stronger program.