How Donald Trump Thinks We Should Fix Social Security

By Markets Fool.com

Photo: Michael Vadon.

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Unlike most of the other presidential candidates, Donald Trump has not offered many specific details on how we should fix Social Security. He has said we need to eliminate fraud, and to redirect some foreign aid money to the Social Security program. And he says that Social Security can be fixed rather simply -- by creating economic growth.

Trump's perspective: A good point, but probably not enough
Instead of focusing on the aging population as the reason Social Security is running out of money, Trump is taking a more-businesslike approach. Rather, he sees Social Security as a cash-flow problem that can be solved by economic growth.

Trump certainly makes a good point. After all, GDP growth would mean job and wage growth. The more jobs there are, the more people will be funneling payroll taxes into the system. And as wages grow, the average worker will be contributing more, because Social Security taxes are a percentage of salary.

However, there are a few big problems with Trump's logic.

First of all, no president can guarantee constantly robust economic growth. Recessions happen from time to time, and the causes are generally beyond the sitting president's control. Second, even if Trump manages to grow the economy at a rapid pace for an entire eight-year presidency, we're not too worried about Social Security eight years from now. We're worried about it 30, 40, or 50 years from now, at which point Trump's hypothetical presidency would be in the history books.

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Finally, the numbers simply don't add up. The Urban Institute did a mathematical model that, even if we boost GDP growth to 3.4% per year from here on out (the postwar average through 2007) from the post-financial crisis average of 2.1%, it would indeed help, but would simply delay the system running out of money from 2034 to 2064.

While economic growth would indeed increase Social Security's cash flow in an immediate sense, there are some other factors to consider. For example, because retirees' Social Security benefits increase over time with inflation, stronger economic growth will eventually create higher benefit obligations, and we'll be left with the same problem. And simply increasing the system's cash flow does nothing to address other Social Security problems, like not providing enough for low-income seniors to live on.

Other Social Security Trump-isms
In addition, Trump has made a few other comments about ways he would fix Social Security. For one thing, he has suggested that we should stop sending foreign aid to countries that "may want to kill us," and instead direct that money to Social Security. This is an intriguing idea, but it's lacking in specifics -- and maybe practicality).

Even so, the fact is that we anticipate sending lots of money to countries like Pakistan, Afghanistan, Syria, and Iraq in 2016, so this isn't necessarily a bad idea. However, our total foreign aid for 2016 is expected to be $33.2 billion -- including money sent to friendlier countries -- and the Social Security deficit is expected to average $77 billion per year through 2018, and rise after that; so this isn't likely to bridge the gap.

Also, Trump has spoken about eliminating fraud and waste in the Social Security system. There's no doubt there is a significant amount of fraud to go after -- such as people collecting Social Security benefits using the Social Security numbers of deceased individuals. However, this alone is likely nowhere near enough to fix the projected shortfall in the system.

How we can actually fix Social Security, even if the economy doesn't grow at a breathtaking pace?
There are a few ways that we know we can fix Social Security, and they all fall into two main categories -- increase taxes, or reduce benefits. Most Democrats are in favor of some form of tax increases, and there are a couple of options:

  • We could increase or eliminate the wage cap for Social Security taxes. Currently, the Social Security tax is only applied to the first $118,500 of income. Many democrats are calling for an increase ($250,000 seems to be a popular number), or an elimination of the cap entirely.
  • Or we could gradually increase the Social Security tax rate. Currently, employers and employees each pay 6.2%. If we gradually increase the tax rate to 7.2% over the next 20 years, it would take care of 52% of the projected shortfall.

On the other hand, Republicans tend to favor benefit cuts. While across-the-board benefit reductions are highly unpopular and unlikely to gain any serious political traction, there are a few alternatives.

  • We could increase the normal retirement age. This seems to be a popular solution among politicians, but is rather unpopular among the public. While many are in favor of a full retirement age of 70, even increasing it to 68 could take a bite out of the problem.
  • We could increase the number of years that benefits are based on. Social Security benefits are currently based on an individual's 35 highest-earning years. If we expanded this to say, 38 years, those extra three (lower income) years would bring down many seniors' averages, and take care of 13% of the shortfall.
  • By changing the way cost-of-living increases are calculated from CPI to the slower-growing "chained CPI," it could cover 25% of the shortfall.
  • We could reduce Social Security benefits for the wealthiest Americans. The system is already weighted toward lower-income workers, so it could be adjusted even more in the same direction.

The bottom line
Trump makes some pretty good points, but this is still far from a "plan" to truly fix Social Security. While things like economic growth and eliminating fraud should certainly be included in any discussion of Social Security's future, the most surefire ways to keep the system solvent remain the same -- raise taxes, or reduce benefits.

The article How Donald Trump Thinks We Should Fix Social Security originally appeared on Fool.com.

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