As we drive headlong into a new year, the magnitude of 2016 is becoming readily apparent. This will be the first time in eight years that American voters will be electing a new president into the oval office. We could also witness a shake-up in Congress, which is currently controlled by the Republican Party in both the House and Senate.
While we'd each like to see our favorite candidate get elected, we, as Americans, taxpayers, and investors, need to be prepared for whatever economic changes might come our way in the coming years as a new president and Congress take office.
One issue that seems bound to dominate the 2016 presidential elections concerns what should be done with the Social Security Program.
Social Security's problems, unmasked
Social Security is best known for providing financial security to our nation's retired workers, but it also covers millions of disabled workers, as well as survivors of eligible workers who've passed away. It and Medicare are often viewed as two of the most important social programs designed to protect seniors as they age.
But Social Security is in trouble. Baby boomers are retiring, and as they leave the workforce the worker-to-beneficiary ratio falls. In other words, there are simply a growing number of retirees eligible to receive a Social Security benefit payments, and not enough workers to replace these boomers. Adding to the programs' woes, people are living longer than ever, meaning beneficiaries can expect to receive Social Security benefit payments for perhaps one-, two-, or even three-plus decades.
According to the latest Social Security Trustees' report, the Old-Age, Survivors and Disability Insurance Trust (OASDI) is likely going to burn through its cash reserves by 2034. To be crystal clear, this doesn't mean that the Social Security program is going bankrupt, but it does require that changes be made at the Congressional level that help raise revenue for the program, cut benefits, or use some combination of the two. If not, the Trustees' report suggests that a 21% benefits cut could be in order for beneficiaries in less than two decades in order to sustain the program until 2087.
What you need to know about Hillary Clinton's Social Security plan
How to fix Social Security has been a hotly debated topic for as long as I can recall, and presidential candidates from both parties have been tasked with finding a solution. Hillary Clinton, the current frontrunner in Democratic polling, is one such candidate.
Although we don't have a detailed Social Security plan as of yet from Clinton – normally leading candidates won't unveil specific plan components until later in the election cycle -- we can look back at previous debates to get a firm understanding of what key points she'd emphasize if she were elected President. Let's briefly examine those points, including the possible benefits and challenges, to get a better understanding of what Social Security could be like if Clinton is elected President.
1. Privatization is off the table
If there is a standout point to Clinton's stance on Social Security over the past two decades, it's that privatizing the program is not a viable option.
Privatization of Social Security would allow workers paying into the program to invest a portion (or perhaps all) of their future benefits into riskier assets, such as stocks, mutual funds, or bonds, that offer the potential for a better return. Doing so would put individuals in charge of their own retirement and allow them the opportunity to outpace inflation over the long run.
The concern here is what might happen to workers who don't have a good understanding of how to invest successfully. If uninformed workers wind up making poor investment choices, they could be in serious trouble come retirement.
Privatizing Social Security could also be disastrous for women, a group of voters that Clinton has vowed to empower. Women tend to work fewer years than their male counterparts and earn less, thus there's a tendency for them to rely on spousal income and survivor benefits during retirement (the life expectancy of women is nearly five years longer than that of men in the U.S.). If Social Security plans shift toward individual account holders, it's possible women could lose this income security from their spouses in their golden years.
2. A payroll tax cap increase is a possibility
One area where Clinton's policy has vacillated a bit over the years concerns whether or not she'd be in favor of raising the payroll tax cap.
The payroll tax cap is the point at which the Social Security payroll tax (which is what funds the program) no longer applies. In 2016, the payroll tax, which is paid half by you and half by your employer, allows every dollar up to $118,500 in income to be taxed. Every dollar earned past $118,500 is free of taxation from the Social Security program. What this means is the vast majority of workers are paying into the Social Security program for the entire year, whereas upper-income earners (those making over $118,500) aren't. Thus, raising the payroll tax cap would shift some of the burden of raising additional revenue for the program to the rich.
In the 2008 presidential debates, Clinton noted her opposition to raising the payroll tax cap, believing it would hurt workers in the middle to upper-middle class that she was vowing to protect. However, as the popularity of the option has grown, her views have changed a bit. Raising the payroll tax cap would affect less than 10% of the population; so Americans found it to be the most amicable solution to fixing Social Security according to an informal poll posted last year via The Washington Post. Clinton has suggested that raising the payroll tax cap could be an option, but it may also involve an exemption between the current cap of $118,500 and, say, a new arbitrary level of $200,000 or $250,000. This way only the richest Americans who could presumably afford it would foot the extra bill.
3. Women and the poor take priority
Another consistent theme throughout the years has been Clinton's view that women and low-income seniors deserve the most assistance when reforming Social Security.
Women, as noted above, work fewer years than their male counterparts, and typically earn less over their lifetimes, making them especially vulnerable come retirement. The concern for low-income seniors is that they sometimes have no choice but to file for benefits as early as possible, leaving them with a benefit payment that could be 25% below their full retirement benefit for life.
Clinton's plans, though vague in this respect, involve boosting the security of women come retirement, and perhaps lifting the minimum benefit for low-income seniors to at least the poverty level. Theresa Ghilarducci, a professor of economics at The New School and external advisor to Mrs. Clinton, opined that raising the minimum wage to poverty level standards is "not very expensive," according to an interview with Huffington Post in August.
Would Clinton's Social Security plan work?
The big question, of course, is whether Clinton's Social Security fixes would actually work.
Obviously it's a stretch to say "yes" or "no" before we even have the nuts and bolts of Clinton's full Social Security plan laid out. But there are definite benefits and challenges to Clinton's early proposals.
For instance, raising the payroll tax cap is a very popular idea among taxpayers since it would wind up affecting very few people. Taxing the richest Americans would raise additional revenue for the program and could push the program's viability without the need for benefit cuts out even farther. Raising benefits for the lowest-income seniors is also likely to be a popular idea.
But there are flaws in Clinton's plan that'll need addressing. For example, raising the payroll cap could have its own set of challenges, beyond just the fact that the high income earners who Clinton wants to tax are often big political donors. For starters, upper-income earners are a major source of job creation in this country, and imposing higher taxes could potentially quell job creation and investment. There's also the idea that as upper-income earners dole out more to the program, they won't see commensurate increases in their own Social Security benefits come retirement. Lastly, raising the payroll tax cap only eliminates a portion of the program's budget shortfall, so additional finagling would need to be done.
We also aren't sure as of yet how much it'd really cost the program to boost retirement benefits for low-income seniors. Doing so without boosting revenue or cutting benefits elsewhere could put the program on an even faster trajectory to burning through its remaining cash reserves.
Needless to say, the coming months should be interesting as the candidates lay out their Social Security plans in detail. Look for more context to be added to Clinton's Social Security plans in the coming weeks and months.