Donald Trump's 2 Potentially Dangerous Approaches to Fixing Social Security

By Markets Fool.com


Image source: Flickr user Florian Schwalsberger.

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Amid the bickering of this year's presidential debates, a number of issues have emerged. Perhaps none has worked its way into the limelight more than Social Security.

Often thought of as America's most important entitlement program, Social Security is designed to provide a financial foundation for low-income retirees during their golden years, as well as supply income to disabled persons and survivors of deceased workers. Unfortunately, Social Security's current path is unsustainable, and both the voting public and politicians vying for the White House know it.

Social Security is coming to a crossroads
Based on the most recent Social Security Trustees' report, the program can continue making benefits payments without any changes for roughly 19 more years. However, by 2035 the cash reserves for the Old Age, Survivors and Disability Insurance Trust will be depleted. The end result is that a 21% cut in benefits would be needed to sustain the program (and payments) for another 52 years.

Why is this happening? It's pretty much a result of two major demographic shifts. First, people are living longer than ever before in the United States. Based on the latest data from the Centers for Disease Control and Prevention, the average American is living to be about 79 years old, or about nine years longer than five decades prior. If beneficiaries are living longer, it means the ability to pull benefits for a longer period of time, thus draining the OASDI.

The other issue is that baby boomers are retiring in growing numbers. As boomers shift out of the workforce, there simply isn't enough payroll tax revenue being generated by new workers and existing workers to cover the expected jump in payments to eligible beneficiaries.

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In sum, Social Security needs some tweaking -- but the nature of that tweaking has long been up to debate.


Image source: Flickr user Ninian Reid.

Donald Trump's hypothetical Social Security fixes pose serious concerns
Many of the candidates for president have released some detail as to how they would counter the pressure Social Security is facing. However, one candidate who's withdrawn from the Social Security debate is Republican front-runner Donald Trump.

It's not uncommon for presidential candidates to reveal their stance on issues in slivers as opposed to giant press releases, but it's somewhat interesting that Trump hasn't revealed his stance on Social Security, a major issue concerning nearly all Americans, during this election cycle (with the exception of stating in October that he'd give up his Social Security benefits in retirement, and calling on other well-to-do persons to do the same).

Yet, in spite of Trump's relative silence, we do have more than a decade's worth of his views on Social Security that can be pored over. Prior to his current presidential run, Trump has been vocal about a handful of "fixes" that he believed would be best for Social Security. Today, we'll look at two of Trump's hypothetical solutions to fix Social Security, as well as how dangerous his two plans could actually be.

1. Privatize a portion of the program
OK, so you'll need to dust off your way-back machine for this, but back in January 2000 Donald Trump released The America We Deserve, a book that highlighted a number of fixes to problems that were at the time plaguing America. Among the problems Trump covered was Social Security. The following is a passage from Trump's book:

The solution to the Great Social Security crisis couldn't be more obvious. Allow every American to dedicate some portion of their payroll taxes to a personal Social Security account that they could own and invest in stocks and bonds. Federal guidelines would make sure that your money is diversified, that it is invested in sound mutual funds or bonds, and not in emu ranches. The national savings rate would soar and billions of dollars would be cycled from savings, to productive assets, to retirement money. And unlike the previous system, the assets in this retirement account could be left to one's heirs, used to start a business, or anything else one desires.

Image source: Pixabay.

On one hand, the idea of being able to invest a portion of my Social Security benefits as I see fit sounds great to me. Then again, I've been actively researching individual stocks for almost two decades. Some Americans simply don't have the time, dedication, or financial know-how to manage investment accounts on their own. If Americans were allowed to make investment decisions with their Social Security benefits and wound up losing money, it could put them in a precarious financial position in retirement. Additionally, lower-income workers might be more liable to take unnecessary investments risks in order to make up for their low wages, thus increasing their chances of losing money.

Privatizing any portion of the program could prove dangerous.

2. Do nothing
In 2013, at a Conservative Political Action Conference, Trump announced that trying to adversely change Social Security, Medicare, or Medicaid during an election simply wasn't a smart move. Here's what Trump actually said according to The Washington Times,

"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."

This statement, which is only from three years ago, could help explain why Trump has avoided taking a firm stance on fixing Social Security. Trump's fellow Republicans have offered a number of solutions, including Ted Cruz, Trump's primary competitor within the Republican Party, who would partially privatize Social Securityas well as raise the retirement age. Raising the retirement age to reflect an aging population is a common solution for Republicans, but one that Trump has avoided endorsing.

Image source: Flickr user Bruce Krasting.

Trump's lack of clarity on the issue could signify that his best solution might be to simply kick the can down the road for another day. Doing nothing will indeed solve Social Security's imminent funding shortfall, but in 19 years it'll ultimately result in a 21% benefits haircut. This reduction in benefits could be catastrophic for low-income Americans relying on Social Security as their primary source of income in retirement. Furthermore, doing nothing could strain income security programs that are in place to ensure that retirees have access to affordable food and housing.

If there is some solace here, Trump in 2011 also referred to Social Security as "honoring a deal," so it doesn't look as if he'd let the program wither away. However, his inaction also implies he might be willing to do nothing during his presidential term, leaving a decision on the program's future to someone else.

Keep this in mind
It's important to once again point out that we're looking at Trump's proposals from a hypothetical standpoint. It's not uncommon for politicians' views on an issue to evolve over time, so it's possible Trump's current views no longer match up with what he had to say three or 16 years prior. However, the simple fact that Trump has only scratched the surface on a Social Security fix, combined with his prior commentary, is a bit worrisome for lower-income retirees and pre-retirees who may be forced to rely on Social Security for a substantial portion of their income in retirement.

In the coming weeks and months I would look for Trump to heed the voting public's concerns regarding Social Security and issue a somewhat detailed plan on how he'd propose to fix it. Until then, we can only speculate on whether Trump will rely on one of his previously discussed solutions.

The article Donald Trump's 2 Potentially Dangerous Approaches to Fixing Social Security originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.