For more than 80 years, Social Security has been providing a financial foundation for our nation's retired workers who can no longer provide for themselves. It's arguably our country's most important social program and single-handedly pulling over 22 million people out of poverty every year.
However, it's also a program that's in crisis. The 2020 report from the Social Security Board of Trustees estimates there will be a $16.8 trillion funding shortfall between 2035 (the projected year when Social Security's $2.9 trillion in asset reserves will be exhausted) and 2094. Without significant changes, retired workers could be looking at a sweeping benefit cut of up to 24% in 15 years or less.
These imminent problems for Social Security are likely to make it a hot-button issue for the November election.
Donald Trump has preferred to influence Social Security by indirect means
For a good portion of his more than three years in the Oval Office, incumbent Republican Donald Trump has mostly kept his distance from discussions regarding Social Security. Rather than enacting any direct changes to the program, President Trump has preferred an indirect approach designed to boost economic growth.
As an example, the passage of the Tax Cuts and Jobs Act (TCJA), thus far the hallmark legislation of the Trump presidency, significantly lowered peak marginal corporate tax rates to 21% from 35%, as well as reduced the effective federal tax rate for a majority of working Americans. Among the many impacts of signing the TCJA into law was the expectation that economic expansion and wage growth would lead to higher levels of payroll tax collection. The 12.4% payroll tax on earned income does most of the heavy lifting for Social Security in terms of revenue generation.
President Trump understands the harsh reality that making direct changes to the Social Security program means some group of people will be worse off than before. This means fixing Social Security could create unhappy voters come election time, which is a big reason why neither party has been all that eager to tackle the issues facing the program.
Trump's wildest Social Security proposals
But President Trump hasn't always avoided calling for direct changes to the Social Security program. Over the past two decades, Trump has offered up three fairly ridiculous Social Security ideas that either had little chance of being effective or would have actually put the program on worse financial footing if they had been implemented.
No. 1: A permanent payroll tax holiday
The first idea, which involves permanently removing the payroll tax, also happens to be the most recent.
With the U.S. facing a massive economic crisis as a result of the coronavirus disease 2019 (COVID-19) pandemic, and Congress unable to come to an agreement on another round of stimulus, President Trump has opined that a smart way to put more money into the pockets of American workers would be to remove the payroll tax. In fact, President Trump signed a handful of executive orders in mid-August, one of which was designed to defer payroll tax collection between Sept. 1 and Dec. 31.
The idea behind deferring payroll tax collection is to allow working Americans to receive a bigger paycheck for the remainder of 2020. But under Trump's executive order, these deferred payroll taxes would need to be repaid in 2021.
But Trump would prefer to take things a step further and has suggested he would favor eliminating the payroll tax in its entirety. Aside from the fact that Democrats and Republicans would oppose such a move, and it's unclear what, if any, legal authority he has to unilaterally enact a payroll tax holiday, suspending the payroll tax would effectively kill Social Security. By one estimate, the program would cease to exist by the midpoint of 2023 if such a proposal became law.
Let's all be thankful that this idea doesn't have a viable path to being implemented.
No. 2: The partial privatization of Social Security
Back in 2000, when Trump's book, The America We Deserve, hit bookshelves, one of the ideas proposed was a partial privatization of the Social Security program. Specifically, Trump suggested that workers should have the option of investing a percentage of their future benefits in stocks, bonds, diversified mutual funds, and bond funds.
Why privatize? One advantage is that it would remove a lot of the red tape associated with the government oversight of Americans' retirement accounts. This way, people would take greater ownership of their financial futures.
Additionally, it would give future eligible beneficiaries an opportunity to build wealth over time. Keep in mind that the stock market, inclusive of dividend reinvestment, has historically returned an average of 7% a year. Comparatively, Social Security's asset reserves are currently earning a measly 2.53% annually via interest from special-issue bonds.
But there are some pretty big flaws with the privatization argument. To begin with, it doesn't actually help the Social Security program. All it does is shift a percentage of collectible payroll tax revenue into a personal account. This could actually create near-term funding concerns for a program that's already expected to burn through its $2.9 trillion in asset reserves by 2035.
Furthermore, putting working Americans in charge of their retirements could backfire. Back in 2017, an 11-question financial quiz from Financial Engines resulted in a 94% fail rate by survey-takers. Allowing workers to invest a portion of their future benefits could result in retirement money being lost, and might even encourage lower-income workers, or those who are behind on saving, to take big risks in order to "catch up."
For what it's worth, Trump has long since distanced himself from the idea of partially privatizing Social Security.
No. 3: A one-time wealth tax on the ultrarich to shore up Social Security
In The America We Deserve, Donald Trump also calls for a one-time tax on the wealthy that he believed would rid the U.S. of its national debt and shore up the Social Security program for a long time to come. This would be a 14.25% tax on individuals and trusts with a net worth of more than $10 million.
Here's the pertinent excerpt from Trump's now 20-year-old book:
I would impose a one-time, 14.25% tax on individuals and trusts with a net worth over $10 million. That would raise $5.7 trillion in new revenue, which we would use to pay off the entire national debt. We would save $200 billion in interest payments, which would allow us to cut taxes on middle-class working families by $100 billion a year or $1 trillion over ten years. We could use the rest of the savings -- $100 billion -- to bolster the Social Security Trust Fund. By 2030, we [will have] put $3 trillion into the trust Fund, which would make it solvent into the next century.
While a novel idea on paper, Trump's thesis that Social Security would be solvent into the next century has two flaws. First of all, the ultrawealthy would likely find loopholes or transfer wealth to family members, which would absolve them from this one-time tax. In other words, the amount of money collected from this one-time tax would probably be lower than expected.
Second, this idea overlooks a host of other ongoing demographic trends with Social Security, such as a 50% drop in net legal immigration, record-low birth rates, and growing income inequality. In fairness, not all of these demographic issues were present when Trump made his case in The America We Deserve. Nevertheless, the point is that Social Security's long-term solvency would still be in question, even if a tax-the-rich strategy had been implemented.