Social Security is often called the "Third Rail" of American politics -- as in, "touch it, you die" -- similar to what could happen if you touch the electricity-carrying third rail of a subway track. Unfortunately, it's also a very large and expensive program that's on track to slash benefits within the next two decades as its trust funds empty.
The sooner Social Security gets fixed, the easier and cheaper it will be to fix it. Unfortunately, even if you assume that each of the Presidential candidates currently running for office has the best of intentions, not a single one has a prayer of really fixing Social Security. Social Security's history, its status as America's political Third Rail, and the downsides associated with each potential fix all stack up against even the best potential fixes from the best-intentioned candidate.
The challenges with fixing Social Security
Ultimately, there are four levers that lawmakers can work with when considering potential fixes to the program.
- Adding more revenue
- Reducing expenditures
- Enhancing potential returns, and/or
- Converting the program from a "defined benefit" style retirement program to a "defined contribution" style one, similar to a 401(k)
While there are benefits associated with each lever, the associated downsides of each are what make the program such an electrified Third Rail for politicians. Looking across those levers, here are some of the key challenges with each of them:
Adding more revenue to Social Security would require a tax hike. Social Security taxes already take 12.4% of covered payroll, and it's easy to paint attempts to increase either the tax rate or the income base as "job killing" or "economy killing" moves. Additionally, a large part of Social Security's popularity comes from the fact that people's benefits are linked to the taxes they pay into it, which means those higher taxes would need to translate to higher payouts to maintain the program's popularity.
Reducing expenditures that Social security pays can easily be painted as "throwing granny off the cliff," or some other scare tactic. Even if that reduction comes in the form of a slower inflation adjustment or other way to simply reduce the rate of growth in spending, it is likely to be attacked as a cut. The unfortunate reality is that, if nothing changes, benefits will be cut by 21% for all recipients when the program's Trust Funds run dry. Just check out the chart below from Social Security's latest Trustee's report to see the official projection:
Enhancing potential returns for Social Security requires a different investing strategy than the program's current method of investing exclusively in special-issue U.S. Treasury Bonds. Prior proposals to allow Social Security to invest in stocks have been decried as both risking Social Security in a "casino," and as giveaways to Wall Street. Additionally, having the government act as a major stockholder raises questions of whether it can remain impartial if put in the position of profiting due to its equity investments.
Converting Social Security to a defined contribution plan from a defined benefit would require massive upfront costs to cover benefits for people who have already paid into the current system. Additionally, it's easy to attack such a move as destroying an important safety net, favoring people who know how to invest well, or as a Wall Street giveaway.
Every adjustment touches the Third Rail
Because every lever that lawmakers can pull to try to truly shore up Social Security touches that Third Rail, none of the current crop of Presidential candidates will really make headway toward fixing it. History suggests -- even as recently as last year when lawmakers passed a patch to keep Social Security Disability from collapsing this year -- that long-term adjustments only happen at the eleventh hour.
The ultimate day of reckoning for Social Security will be well after the next President leaves office. As the chart above indicates, the Trust Funds will run dry, and drive those benefit cuts around 2034. Even a two-term President will be out of office by 2025, well before the Trust Funds empty. Even though the ultimate fixes will be easier and cheaper if the next President handles them rather than kicking the can to his or her successor, the odds are against any true fixes being implemented that quickly.
That's what happens when you deal with the Third Rail of American Politics. Even if you act with the best of intentions to preserve Social Security, the downsides of any fixes will prevent anything from being implemented until lawmakers find their backs against the wall. That's why no Presidential candidate will really fix Social Security.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.