Here's What a Trump Presidency Means for Social Security

By Markets Fool.com


Image source: Getty Images.

Continue Reading Below

Social Security was arguably the biggest issue on the minds of senior citizens heading into this election season, and for good reason. Based on the most recent data released from the Social Security Administration, more than 60% of seniors currently receiving Social Security rely on their benefit for at least half of their monthly income. Seniors understood fully that the next president of the United States -- who we now know to be Donald Trump -- would have the opportunity to shape the future of America's most important social program.

The reason Social Security needs some serious changes involves two ongoing demographic changes. First, baby boomers are retiring at an average pace of more than 10,000 people per day, meaning the worker-to-beneficiary ratio is dropping. In simpler terms, there's simply not enough payroll tax revenue being generated to counteract the growing retirement benefits being paid out to beneficiaries leaving the workforce. The second factor is that the average American life expectancy has increased by about nine years since the mid-1960s. Combined, these demographic shifts are putting a major strain on Social Security.

According to the 2016 Social Security Board of Trustees report, the Trust that holds more than $2.8 trillion in spare cash could be depleted by the year 2034. If this were to happen, an across-the-board benefit cut of up to 21% might be needed to sustain the program through 2090. This isn't a promising scenario for the aforementioned majority of seniors who need Social Security income to meet their monthly expenses.


Image source: Disney-ABC Television Group via Flickr.

Here's what a Trump presidency means for Social Security

Continue Reading Below

So what exactly does Donald Trump's presidency do for Social Security? On the surface, it doesn't look like much at all.

Trump's campaign made little mention of Social Security, which is surprising, given that Republican presidential candidates tend to cater to seniors, a group they rely on heavily for votes. Trump's sole position during his campaign was that he would honor the pledge made by America to ensure that seniors receive the benefits they're due.

Rather than tackling changes to Social Security itself, Trump's pledge revolves around making changes to the individual and corporate tax structure in order to boost the growth of the U.S. economy. Having forecast GDP growth as high as 4% during his campaign, Trump believes faster growth should lead to rising wages and thus an increase in payroll tax collection.

Image source: Getty Images.

To accomplish this, Trump wants to implement the same simplified individual income-tax schedule previously proposed by the Republican-led House of Representatives. There would be just three proposed progressive tax tiers (12%, 25%, and 33%), with the vast majority of Americans paying less in individual income tax than they are now (assuming equal income). In theory, having more cash in hand should encourage consumption, which doesn't seem like a bad idea, considering that 70% of U.S. GDP is based on consumption.

With regard to corporate income taxes, Trump aims to cut the peak rate by more than half from 35% to 15%. At 35%, the United States has the third-highest peak corporate income tax rate in the world, behind only Puerto Rico and the United Arab Emirates. The logic goes that allowing U.S. companies to keep more of what they earn will lead them to reinvest in more jobs. It could also ignite foreign investment in the United States.

But will it work? That's the big question. On the other side of Trump's tax-cut equation is the expectation of lower revenue collection by the federal government. The Tax Foundation ran an analysis of Trump's revised tax proposal that was released in August and concluded that it would lead to a $3 trillion reduction in revenue collected over the next decade.

Furthermore, it's likely that we could see the national debt increase from its current level. Higher debt levels mean that a higher percentage of the federal budget is needed to service the interest on that debt, potentially pressuring important social programs such as Social Security, Medicare, and Medicaid.

If Trump's tax and economic plans don't deliver the growth he has suggested, then Social Security's current trajectory of a budgetary shortfall won't change one iota.


Image source: Iowa Public Radio Images, John Pemble via Flickr.

Could a compromise be in order?

Not only does Trump's completely hands-off approach to Social Security have a low probability of fixing the programs' issues, but it's also unpopular with the American public. An informal poll conducted by The Washington Post in 2014 found that of 12 possible Social Security solutions, the two least popular essentially involved doing nothing and passing the problem further down the road.

Considering how important Social Security is to seniors and pre-retirees, it's possible that we could see a compromise between the Republican-led Congress and Donald Trump. Trump has drawn a line in the sand against raising Social Security's full retirement age, or FRA, but increasing the FRA has long been a suggestion of key Republican leaders. It also happens to be the second-most popular Social Security fix in the aforementioned Washington Post poll, trailing only raising the payroll tax earnings cap.

Image source: Getty Images.

Your FRA is a dynamic number that's based on your birth year, and it determines when you're eligible to receive 100% of your benefits. File for Social Security benefits before reaching your FRA, and you'll receive a monthly payment that's below full (100%). In fact, enrolling as soon as possible (age 62) could lead to a payment that's between 25% and 30% below your FRA benefit. However, wait until age 70, the age at which your Social Security benefits stop growing in value, and your monthly benefit could range between 124% and 132% of your FRA benefit.

Because people are living longer than ever, they need their benefits to last even longer. Thus, with 45% of eligible seniors claiming benefits at age 62, and roughly 60% filing for benefits before reaching their FRA, the program is becoming strained. Gradually raising the full retirement age to between ages 68 and 70 would account for longer life expectancies and encourage retirees to wait longer to file for benefits. It could even coerce some seniors in good health to work longer, thus contributing even more to payroll tax revenue.

Of course, we also know that most Democratic congressmen and congresswomen don't approve of raising the FRA. Neither does Trump at the moment, for that matter. But given the need to protect Social Security for current and future generations, a compromise isn't out of the question down the road.

The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, 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.